Chapter-One

General Introduction
1.1 Projects vs. Operational Work
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Organizations perform work to achieve a set of objectives. Generally, work can be
categorized as either projects or operations, although the two sometimes overlap.
They share many of the following characteristics:

 Performed by people
 Constrained by limited resources
 Planned, executed, and controlled.

Projects and operations differ primarily in that operations are ongoing and
repetitive, while projects are temporary and unique. The objectives of projects
and operations are fundamentally different. The purpose of a project is to attain
its objective and then terminate. Conversely, the objective of an ongoing
operation is to sustain the business. Projects are different because the project
concludes when its specific objectives have been attained, while operations adopt
a new set of objectives and the work continues.

Projects are undertaken at all levels of the organization and they can involve a
single person or many thousands. Their duration ranges from a few weeks to
several years. Projects can involve one or many organizational units, such as joint
ventures and partnerships.

The difference and common feature that characterizes both operation works and
project works can be summarized as follows by using the figure 1.1 below:

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Figure 1.1: Differences and common features of operational and project
works

1.2 Definition of Project

It is very difficult to find a single comprehensive definition of project because

projects are different in terms of their nature and objectives. Some of its
definitions are:

According to Gittinger (1982), a project is defined as a complex set of activities

where resources are used in expectation of returns and that lead itself to
planning, financing, and implementation as a separate unit.
 A project usually has a specific starting point and a specific ending
point, intending to achieve specific objectives.
 It usually has a well-defined sequence of investment and production
activities and a specific group of beneficiaries that can be identified,
quantified, and valued, either socially or monetarily.
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  Project- is an investment activity in which specific resources are committed
within a given time frame, to create capital assets over an extended period of
time in expectation of benefits that exceed to the committed resource.
 Project- is a task of considerable magnitude that must be completed within
a budget and by a specific time; usually but not always carried out at once.
 Project- is a non repetitive activity that is goal oriented, that has a
particular set of constraints, the output of which is measurable, and that
changes something when carried out.
 Project- is a set of proposal for investment of resources in to a clearly
defined set of actions that are expected to produce future benefits of a fairly
specific kind, the whole series of actions being the subject of individual
planning and examination before being adapted and implemented within a
single overall financial and managerial framework.

1.3 Common Characteristics of projects.

Though project can be defined in various ways and they differ in many respects,
the following are common features of projects. These are:

 Project involves the investment of scarce resources in expectation of future

benefits,
 Project is an activity that is capable of being planned, financed and
implemented as a unit,
 Project has a defined set of objectives and specific start and end dates,
 Project has geographical or organizational boundaries.
 It is an activity around which conceptual boundaries can be ascribed,
 A project can be seen as an activity which is likely to have a partially or
wholly independent administration.

1.4 Classification of Projects

Projects can be classified based on several criteria, including: ownership,
sources of finance, and forces behind the projects.

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1. Based on Ownership:
a. Private sector- mostly projects undertaken by business enterprise.
b. Public sector- projects undertaken by national and local
government body.
c. NGO’s – development projects are most often undertaken by non-
government and not for profit organizations
2. Based on the Sources of Finances:
a. Government treasury- projects may be entirely financed by
government budget as per its priority. For instance, construction of
regional airport.
b. Government treasury and external sources- most projects are
financed by the joint partnership of the government and donor
groups. For example, a road project may be financed 50% by
government and 50% by foreign donors.
c. External Sources of Finance- Projects may be financed totally by
parties other than the government but established for the wellbeing
of the citizens and the ownership may be for the government or the
public.
3. Based on the Forces Behind;
a. Demand driven/need driven- based on identified unsatisfied
demand project can be created or on unsatisfied basic needs like
food, water and shelter.
b. Donor Driven- the force behind the financing organization. Donors
will have their own say and influence the types of projects to be
established.
c. Political Driven- Projects may be established in response to some
political situation such as for example because of National
Elections, projects by religious organizations, etc.
4. Based on their Nature:
a. Civil engineering, Construction, petrochemical, mining,
quarrying projects- projects far away from the contractors’ home

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 office, and involve especial risk as well as problems organizational
communication.
b. Manufacturing projects- conducted in a factory or other home
based environment and enable exercising on the spot management.
c. Research Projects- established for pure research consuming large
sum of money and lasting over years resulting in dramatic
profitable discovery or proving waste of money.
d. Management projects- projects that require the employment of an
external project manager or managing contractor for issues such as
relocating head quarters, developing and introducing a new
computer system, preparing for a trade exhibition, producing a
feasibility or other study report, restructuri9ng the organization,
etc.

Projects can also be differentiated by the following:

 Long-term Vs short term projects

 Regional, national, international projects
 Agricultural Vs industrial projects.
 Capital, labor or energy intensive projects.

1.5 Project Management

Project management can be defined as the set of concepts involved in the
realization of goals through efficient, effective, transparent and responsible
administration of a given set of activities, with associated accountability for the
outcomes in the process, so as to meet basic objectives and enhance the
satisfaction of stakeholders. In this process, all stakeholders should be consulted
in matters affecting a project to ensure co-ordination in project activities.

Project, Plan and Program

There are some degree of relationships between projects, plans and programs.
There are also significant differences. Their hierarchical relationship is given
based on the following chart.
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 Development goals/Objectives

Development Strategy

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

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 Exhibit 1.2 Hierarchical Relationships

Development Goal/Objectives

A development goal or objective is a statement of intension or aspiration of a

government to improve living conditions of its people – Vision of the government.
For example, growth, equity in income distribution, reduction of unemployment.
It is a comprehensive statement which guides development. It determines the
environment or framework within which development is expected to take place.

Development Strategy

A strategy is defined in various ways by different authors. But in general it refers

to the general methods of achieving specific objectives at national or
organizational levels.

It mainly describes the essential resources which will be committed to achieve

objectives. It also explains how these resources will be organized. Example, it
may ask how to organize the labor force of organization or the object. It can take
different forms such as import substitute, export promotion, ADLI, etc.

Development strategy is likely to involve:

 Establishment of sector goals- for example, what is the goal of

agriculture sector in the next 5 years, 10 years; the industry sector in
the coming 10 years.
 Defining of the means to achieve the sector goals.
 Determining of the feasibility of achieving the stated goals from the
political, technical, organizational and resource point of view.
 Preliminary assessment of costs and benefits of goals and objectives.
 Setting priorities- which sub-sector should be provided more attention
in each sector.

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 Plans and Projects

    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.”

 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.

Plans are designed as a means to accomplish development strategies; National

Plan should identify priority areas and set a specific objective. The specific
objective can be achieved through various means (fiscal policies and development
projects).

As it can be observed from Exhibit 1.2, 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.
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  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. 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.
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  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 well-
being.

Projects and Programs

It is necessary to distinguish and/or understand the difference between
projects and programs because there is sometimes a tendency to use them
interchangeably.

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  A project, in this regard, refers to an investment activity where

resources are used to create capital assets that produce benefits over
time, having a beginning and an end, and specific objectives pursued;
 Whereas a program is an on-going development effort or plan. A
program is, therefore, a wider concept than a project.

A program may include one or several projects at various times whose

specific objectives are linked to the achievement of higher level of common
objectives.
For instance, a health program may include

 A water project as well as construction of a health center;

 Both are aimed at improving the health of a given community that
previously lacked easy access to these essential facilities.

Projects that are not linked with others to form a program, however, are
sometimes referred to as “Stand-Alone" projects.

 Said differently, a program is a definite plan or scheme of any

sequence of operations aimed at the attainment of the planned
objectives.
 This explanation, however, assumes that a program is a plan of
activities with general objectives that would be derived from the
development plan.

In general, programs and projects have got their own differences and
similarities. For purpose of clarity, it is important to outline the major
differences and similarities between the two concepts.

In this regard, the following table depicts, comparatively the differences between
projects and programs.

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 Differences
Projects Have: Programs Have:

 Specific objectives  General objectives/wide/diverse

 Specific projects area  No specific area (location)/diffused
(location)
 Specific beneficiaries group  No specific beneficiaries group
 Clearly determined and  No clear and detailed financial
allocated funds resource allocation
 Specific lifetime  No specific lifetime

Similarities
Projects and programs have similar characteristics in that both are:
 Having objectives;
 Requiring financial, human, material, and other inputs (or resources)
 Generating outputs of value (i.e. goods/services);
 Serving as instruments for the execution of development plans and
attain national goals.

1.6 Project Environment

All projects are planned and implemented in a social, economic, environmental,

political and international context.

o 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.
o 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.

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o Physical Environment is the knowledge about local ecology and physical
geography that could affect the project, or be affected by the project.

1.7 Project manager

Who is a Project Manager?

A project manager is a professional in the field of project management. They

have the responsibility of the planning and execution of any project. A project
manager's central duty is to ensure the success of a project by minimizing risk
throughout the lifetime of the project. This is done through a variety of methods,
both formal and informal. A project manager usually has to ask penetrating
questions, detect unstated assumptions, and resolve interpersonal conflicts, as
well as use more systematic management skills.

In whatever field, a successful project manager must be able to envisage the

entire project from start to finish and should have the ability to ensure that this
vision is realized.

1.8 Project Planning

To be effective, the project planning should be approached systematically. Some
activities to be done and questions that need to be asked at planning stage of a
project may include the following:

1. Situational analysis- is identification of the current situations and

assessing the factors that leads to current position. This involves
answering questions such as:
 Where are we now?
 How we reached to this point?
 Why and how we reached to the current position?
 Is this where we want to be?
2. Setting Objective- This involves answering questions such as Where
should we find ourselves in 5 to 10 years time from now?

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 3. Identification of alternatives and strategies- How can we reach to
the place that we want to go in the indicated time limit?

4. Identification of strengths, weakness, opportunities and threats-

what might prevent us from getting there and what might help us to get
there? (SWOT analysis).
5. Action plans and implementation- What do we need to do, where do
we need to do it, how will we do it and who will do it?
6. Monitoring and evaluation- What do we need to do to be on course,
can we do it, and how do we know when we have arrived?
7. Budgeting- Involves quantification of the costs involved.

1.9 Why projects are Undertaken

The principal purposes or goals of undertaking projects depend on the nature of

the project:

 Development Project (usually undertaken by government or NGOs) – May

have the following objectives:
 Projects are very powerful and efficient means to achieve development
or growth. They are said to be cutting edge of development.
 They are mechanisms for improving income distribution. For example,
implementing a project that enhance the income of the poor people or
that benefit the majority poor.
 They are mechanisms to solve immediate problems. For example,
implementing a project to solve specific problem in the society such as
projects to eradicate malaria such as Anti-Malaria Association, projects
to prevent the spreading of HIV/AIDS such as Tesfa Goh Ethiopia,
project to eliminate poverty.
 Project undertaken by Business Organizations- have a primary objective
of maximizing the wealth of current shareholders. Other objectives may
include maximization of profit, maximization of earning per share or

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 maximization of return on equity. They will also have indirect objectives of
creating employment opportunities, and other social benefits.

CHAPTER TWO
2. THE PROJECT CYCLE

What is a Project Cycle and Why?

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.

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. 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.

Models of Project Cycle

There are different models of project cycle but the following are discussed as an
instance

1. The Baum’s Project Cycle

2. The UNIDO Project Cycle”.
3. The DEPSA’s Model.

1. The Baum Project Cycle (World Bank Project Cycle)

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 A project with the characteristics already outlined above typically run through
at least several separable stages that can be thought of as constituting a
definite sequence, which some writers and institutions have called “a project
cycle”. In 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:

1. Identification
2. Preparation
3. Appraisal and Selection; and
4. 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.

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 available 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
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 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.

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.

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  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.

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 or not before large sums are committed.
 Generally, internal government staffs only used, for public projects, for
this work and not consultants, and projects, in this regard, are apprised
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:

1. Technical: here the appraisers concentrate in verifying whether what is
proposed will work in the way suggested or not.
2. 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.
3. 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.
4. 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
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 plan.
5. 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.
6. 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.
7. 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 or not. 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).

After appraisal, the viable project proposals are chosen for implementation
on the basis of the priorities of the stakeholders and the available resources.
For instance, the Treasury, for public projects, may impose a ceiling on the

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 ministries with a big portfolio of investments, calling for prioritization of the
core over lower priority projects. In practice, there can be quite sequence of
project selection decisions.

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.

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,

 Repayment period,
 Interest rates on loans,
 Flow of funds,
 Contributions from stakeholders, and
 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.

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.

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 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.

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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.

Some of the aspects of implementation that are of particular relevance to

project planning and analysis, therefore, are the following:

i The first is that, the better and more realistic a project plan is, the more
likely that the plan can be carried out and the expected benefits realized.

 This emphasizes once again the need for careful attention to each
of the seven aspects of projects.

ii. The second 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 (soils, water logging,
and nitrogen application); price changes; economic policy and
environmental changes; political changes, etc.
 Moreover, all these alter the way in which projects should be
implemented.

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),

 To look back what took place in the past,

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  To 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. 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.
 The sponsoring agency, perhaps, the operating ministry, the
planning agency, or an external assistant 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 also help in the planning of future projects.
 Experience with one project can give rise to new ideas for extension
of the project, repetition, need for associating projects “vertically”
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 that supply inputs to or process products from this project, and
other ideas that become the seeds to generate new project proposals.

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.
In this regard, 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.

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.

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)

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Support or functional studies are also part of the project preparation stage
and are usually conducted separately, for later incorporation of the findings 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 Pre-investment phase in to stages avoids the attempt to

proceeding directly from project idea generation (identification) to the
final feasibility study without examining the project idea systematically or
being able to present alternative solutions. This cuts out many feasibility
studies that would have little chance of reaching the investment phase.

This also ensures that the subsequent project appraisal task, made by
national or international financing institutions, 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
undertaken and poorly prepared document 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.

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,
 The existing agricultural base (it may be the basis for agro-industries),
 Future demand for consumer goods,
 Imports substitution and export possibilities,
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  Environmental impacts (mandatory or non-revenue producing projects),
 Expansions of existing capacity,
 Manufacturing sector (benchmarking from other countries),
 Diversification

Opportunity studies are rather sketch in nature and rely more on aggregate
estimates than on detailed analysis. To this end, opportunity studies could be
general or specific.

General opportunity studies, (referred to as “sector approach”), could be area

studies designed to:

 Identify opportunities on a given area (Administrative province, backward

region, etc);
 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 resources.

Specific project opportunity studies, (referred to as "enterprise approach"),

are seen, for instance, in the form of products with potential for domestic
manufacturing. A specific project opportunity study may be defined as the
transformation of a project idea into a broad investment proposition.

In general, a project opportunity study should not involve any substantial

cost, as its intention is primarily to highlight the principal investment aspects
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 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.

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Therefore, before assigning larger funds for such a study, prior assessment of
the project's idea might be made in a pre-feasibility study. This helps to see if:

 All possible project alternatives are examined

 The project concept justifies detailed study,
 All aspects are critical and need in-depth investigation, and
 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 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,

 Raw material and factory supply studies,
 Laboratory and pilot plant tests,
 Location studies,
 Environmental impact assessment,
 Economies of scale studies, and
 Equipment selection studies

The contents of a support study vary, depending on the type and nature of
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.

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 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 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 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,

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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 equipments 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.

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

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in line with these criteria center around technical, commercial, market,
managerial, organizational, financial, and, possibly, socio-economic aspects.

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

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 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 to keep the project
within the forecast made in the feasibility study.

3. The Operating Phase

The problem of the operating phase needs to be considered from both

a short- and a long-term view point.

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

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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.
The given outline of the investment and operating phases of an
industrial project is undoubtedly an oversimplification for many projects,
and, in fact, certain other aspects maybe revealed that even have greater
short- term or long-term impacts.

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 The DEPSA’s Project Cycle
This model is 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. 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,

2. Investment phase, and

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 3. Operating phase

Each of these three phases may be divided into stages. The Guideline has
divided the above phases into six stages as follows:

1. Identification,
2. Preparation,
3. Appraisal/decision,
4. Implementation,
5. Operation, and
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.

A project cycle, in other words, 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 emphasize 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 (obtaining)
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 a task of eliminating less

viable ideas and alternatives; and in the continuum, the planner naturally
hopes that the best alternative will emerge. In this process:

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  The results and/or outputs 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;

 The output or part of the output of one stage may be used as new
input (feedback) to reconsider or revise, where necessary, the results
of proceeding stages; and
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

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