Chapter 1.

General Introduction
Meaning and Definition of Projects:

Origin and Meaning: The Term project came from ‘Projection’ which means looking into
future.

The term project in general means shoot forward, or to scheme, or plan something to be done.
Actually Project means –one time joba that has defined starting and ending dates, a clearly
specified objective, or scope of work to be performed, a predefined budget, and usually a
temporary organization which disappear once the project has been completed.

In other words, project refers to an investment activity where resources are used to create capital
asset that produce benefits over a long period of time and has a beginning and an end with specific
objectives.

According to Dictionary, project means a piece of work that is carefully planned to achieve a
particular aim. Projects may be Personal, Industrial, and National and may be of Business or Non-
business type.

Examples of some projects:

 Developing a new product or service

 Building a bridge, road, runway, or other structure
 Writing a software
 Installing a new manufacturing process
 Publishing a book
 Developing a new marketing plan
 Obtaining an MBA degree
 Planting a garden
 A wedding plan
 Constructing a house
 Establishing a plant or designing a car or new machinery etc;
Definitions:
1. A project is a problem scheduled for solution. (J.M.Juran)
2. A project is a task of considerable magnitude that must be completed within a budget and
by a specific time, usually but not always carried at once.
3. Project is an investment activity in which specific resources are committed with in a given
time frame, to create capital assets over an extended period of time in expectation of
benefits that exceed the committed resource.

1
 4. The project management institute, U.S.A defined a project as a one short time limited and
goal directed major understanding that requires the commitment of varied skills and
resources.
5. Modern time’s projects are defined as a scientific and systematic study of a problem which
is intended to be resolved through the application f management concepts and skills
evolving a work plan devised to achieve a specific set of objectives within a specific period
of time.
6. Project is any investment opportunity which is to be exploited for profit. It may be
therefore consisting of a new product, new service, new organization, new business or a
new process.
7. Project is a schedule of activities in which resources are spent at present for getting certain
benefits in the future.

Features of projects:

 Investment of scarce resources in expectation of future benefits

 Is an activity that is capable of being planned, financed and implemented as a unit
 Have a defined set of objectives and specific start and end times
 Non-repetitive
 Problem solving
 Have geographical or organizational boundaries
 Independent administration
 creation of capital asset
 Future benefit
 Commitment of scarce resources
 Projects involve special financial arrangements

Why projects are undertaken? /Benefits of projects

 Development or growth of a nation, region, city, village etc.

 Long term growth of company and resulting to increased welfare of employees
 Improvement of income distribution
 Solving immediate problems
 Providing employment and transport facilities
 Increase in wealth of suppliers of resources including owners or shareholders
 Other social benefits like bringing change in society, accelerate the process of elimination of
poverty, socio-economic development etc.
Projects Vs programs
It is necessary to distinguish between projects and programs because there is sometimes a
tendency to use them interchangeably but they have different meanings.
A program is an ongoing development effort or plan which may not necessarily be time
bounded.

2
 Definition: “a definite plan or scheme of any sequence of operations aimed at the attainment
of planned objectives.”
Example: Road development program, a health improvement program, continues education
program, distance education program, a nutritional improvement program, a rural
electrification program etc.
Major difference between a project and a program lies not in objectives but in scope, the details
and accuracy. Projects are subunits and bricks of programs. Programs include one or several
projects at various times.
Differences:
Projects Programs
Scope narrow wider
Objectives specific general
Beneficiary groups specific numerous
Financial resources clearly determined not clear and detailed financial
and allotted funds resources
Time time bounded not time bounded
Similarities:
 Both have objectives as well as goals
 Require resources like financial, personnel, material and other
 Generate outputs of goods and services
 Serve as instruments for the execution of development and plans to develop the
economy of a nation.

Types and classification of projects:

1. Quantifiable and non- quantifiable projects:
 Quantifiable projects are those in which a quantitative assessment of benefits can be
made.
Example: Industrial projects, power generation projects, mineral development projects etc.
 Non quantifiable projects are those where such assessment is not possible
Example: Health, education, defense projects etc.
2. Sectoral classification of projects:
Based on the usefulness of projects in resource allocation at macro level, they may be classified
into the following sectors:
 Agricultural and allied sector projects
 Irrigation and power sector projects
 Industry and mining sector projects
 Transport and communication sector projects
 Social service sector projects
 Miscellaneous projects

3
3. Techno-Economic projects:
Based on their techno aspect, projects can be classified into three groups which are useful in the
process of feasibility appraisal and the techno-economic feasibility studies:
a. Factor intensity- oriented classification: Here projects may be classified as capital intensive
or labor intensive projects.
b. Causation- oriented classification: Here projects are classified as demand based or resource
based projects.
c. Magnitude- oriented classification: Here projects are classified on the basis of investment as
mega scale, large scale, medium-scale, or small scale projects.
4. Financial institutions based Classification:
Financial institutions classify projects according to the age, experience and purpose for which the
project is being taken up as follows:
 New projects
 Expansion projects
 Modernization projects
 Diversification projects
5. Service projects:
These are further classified as:
 Welfare or non-commercial projects
 Commercial projects
 Research and development projects and
 Educational projects
6. Ownership and control based classification:
Under this, projects are classified as
 Corporate projects
 Partnership projects
 Sole-proprietor projects
7. Technology based classification:
Based upon the technology applied, projects are classified as;
 High technology projects (most sophisticated technology)
 Conventional technology projects (out dated technology)
8. Risk based classification:
Under this classification, projects are classified into:
 High risk projects
 Medium risk projects
 Small risk projects

9. Country origin based classification;

 Domestic projects/national projects
 Foreign projects/international projects
10. Productivity based classification:
Under this projects are classified into:
4
  Directly productive projects:
In directly productive projects, the benefits and cost of the projects are accrued to a single large
organization. This organization will be able to calculate the surplus.
 Indirectly Productive projects:
These are the projects where the benefits derived from a new project do not accrue to the
organization responsible for carrying out the costs. Hence, the resulting surplus is not concentrated
in the hands of a single organization. In case of indirectly productive projects, the calculation of
benefits is difficult.
Ex: roads, schools, health projects where the benefits accrue to the users.
The project Life cycle:
The different stages/phases through which a project passes is called the project life cycle. The main
features and elements of this process are information gathering, analysis and decision making. The
project cycle consists of various stages in which each stage, not only is grown out of the preceding
ones, but also leads into the subsequent ones.
There is no single way of devising the different phases of a project. there are many equally valid
ways in which the project cycle may be divided. There are three basic models of project life cycles
they are:
1. The Baum project life cycle
2. UNIDO project life cycle
3. DEPSA project life cycle
 The Baum project life cycle (World Bank procedures)
The first basic model of a project cycle was that of Baum developed in 1970, which has been
adopted by the World Bank and initially recognized four main stages, namely
1. Identification
2. Preparation
3. Appraisal and selection
4. Implementation
At a later stage in 1978, the author has added another stage called “Evaluation “thus making the
stages 5 in number.
1. Identification Phase:
The first stage in the project life cycle is to find potentially promising projects which are
worthwhile for investment. Some of the sources of such projects are listed below:
 Some projects are resource based and stem from the opportunity to make profitable use of
available resources.
 Some may be market based arising from an identified demand in home or overseas markets.
 Others may be need based and initiated to make available certain basic material
requirements and services to all people in an area at minimal amounts.
 Well informed technical specialists and local leaders are also common source of projects.
Technical specialists will identify many areas where they feel new investment might be
profitable, while local leaders may have suggestions about where investment might be
carried out.
5
  Ideas for new projects also come from proposals to extend existing program.
2. Preparation Phase:
Once projects are identified, there begins a process of progressively more detailed analysis of the
projects and preparation of the project plans. This phase of the project life cycle normally includes
both the prefeasibility and feasibility study. This is the stage at which the project is being seriously
considered as a definite investment action. Project preparation covers the establishment of all the
technical, economic, social, financial, institutional and environmental feasibility analyses. From
the inferences of such analysis, decisions have to be made on the scope of the project, location and
site, soil and hydrological requirements, project size etc. At this stage the project exists as asset of
tangible proposals.
3. Appraisal Phase (an assessment of the quality or value of something)
At this stage critical review of the project is to be conducted. This provides an opportunity to re-
examine every aspect of the project proposal (project plan) to assess whether the proposal is
appropriate and sound before large sums are invested. Generally, only internal
institution/government staffs are used for this work. Projects are appraised both in the field and at
the desk level. Appraisals should cover at least seven aspects of the project, each of which must
have been given special consideration during the project preparation stage. Those seven aspects
are:
 Technical- here, the appraisals concentrate on verifying whether the proposed project will
work in the way suggested or not.
 Financial- In this, the appraisals try to see whether 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.
 Commercial-the way the necessary inputs for the project are conceived to be supplied is
examined. Here also the arrangements for the disposal of the products are verified.
 Incentive- the appraisals here will see into 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.
 Economic- the appraisal here tries to see what is proposed is good from the view point of
the national economic development interest when all project effects (positive and negative)
are taken into account and check whether all are correctly valued.
 Managerial- this aspect of the appraisal examines whether the capacity exists for operating
the project and the people who were assigned responsibilities can operate it satisfactorily
or not. Moreover, it tries to see whether the responsible persons are given sufficient power
and scope to do what is required.
 Organizational- this appraisal examines the project if it is organized internally and
externally into units, contract policy institution, etc., to allow the proposals to be carried
out properly and to allow for change as the project develops.
The above issues are the subjects of specialized appraisal report. On the basis of this report,
financial decisions are made- whether to go ahead with the project or not. In practice, there can
be quite a sequence of project selection decisions. Following appraisal, some projects may be
6
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.
4. Implementation Phase:
The clear objective of any effort in project planning and analysis 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.
It is during implementation stage that many of the real problems of projects are first identified.
Because of this feedback effect on the discovery and design of new projects, and the
deficiencies in the capabilities of the project action can be revealed. Therefore, to allow the
management to become aware of the difficulties that might arise, in recording, monitoring and
progress reporting are important activities during the implementation stage.
5. Evaluation Phase:
At later stage, that is in 1978 BAUM has added an additional stage called Evaluation which
usually closes the project life cycle. Once a project has been carried out, it is often useful to
look back over what took place; to compare actual progress with the plans, to judge whether
the decisions and actions taken were corrective, to see whether the results obtained are optimal
in a sense that the resources are efficiently utilized and whether the project’s goals and
objectives are effectively achieved. The extent to which the objectives of a project are being
realized provides the primary criterion for an evaluation. The analysts look systematically at
the elements of success and failure in the project experience to obtain insights about how to
plan more productive projects in future.

Evaluation is not limited only to completed projects. It is the most important managerial tool
in ongoing projects and rather formalized evaluation may take place at several times in the life
of project. Evaluation may be undertaken when a project is in trouble, as the first step in a re-
planning effort. Careful evaluation of the project should precede any effort to plan follow-up
projects. Finally, evaluation should be undertaken when a project is terminated or as well in
routine operation. Different people may do evaluation like:
 Project management will be continuously evaluating its experience as implementation
proceeds.
 The sponsoring agency, 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 until responsible for monitoring the projects implementation and
for bringing problems to the attention of the project’s management.

7
Evaluation can help not only in the management of the project after the initial phase but also in the
planning of the future projects.
 The UNIDO model:
The United Nations Industrial Development organization (UNIDO) is the most devoted institution
towards the development and the standardization of the concept, context and content (CCC) of
industrial project management system. According to the UNIDO approach documented in the
UNIDO manual, the project development cycle comprises three distinct phases, they are:
1. Pre- investment phase
2. Investment phase and
3. Operational phase
Each of these three phases is divided into several stages, some of which constitute important
consultancy, engineering and industrial activities as shown below:
1. Pre- investment phase
 Opportunity study (identification of project ideas)
 Pre-feasibility study (preliminary project formulation, selection of alternatives)
 Feasibility study (techno-economical project back ground, final project formulation stage)
 Evaluation report (decision making about project availability)
2. Investment phase
 Project design stage
 Construction stage
 Pre-production marketing stage
 Training
 Start-up stage

3. Operational phase
 Replacement of equipment
 Development, invasion or liquidation
Before dealing with pre –investment phase, the various stages of the investment and operational
phases are considered since these impacts on the nature and scope of pre-investment studies. The
project investment or implementation phase for a large industrial business project will be different
as compared to that of a small non- industrial project.
Assuming that a projected industrial activity involves the construction of a factory and the
installation of machinery and equipment, the project investment phase could be divided in to the
following stages:
 Project engineering designs
 Negotiations and contracting
 Construction and training and
 Plant start up
An adequate importance should be given to the pre investment phase, because the success or failure
of an industrial project ultimately depends upon the marketing, technical, financial and economic

8
feasibility study findings and their interpretation. 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.
A. Pre-investment stage
It is a usual practice; project ideas must be elaborated in a more detailed study. However,
formulation of the detail techno-economic feasibility study, that enables a definite decision to
be made on the project, is a costly and time consuming task. Therefore, before assigning large
funds for such a study, a preliminary assessment of the project idea must be made in a pre-
feasibility study. This is just seeing that whether:
 All possible project alternatives are examined
 The project concept justifies the detail study
 All aspects are critical and need in-depth investigation
 The project idea is viable and attractive or not
According to the UNIDO manual, the main stages of the pre-investment phase are as follows:
 Identification of investment opportunities (opportunity studies)
 Analysis of project alternatives and preliminary project selection
 Project preparation (pre-feasibility and feasibility studies) and
 Project appraisal and investment decision (appraisal report)
These stages assist a potential investor in the decision making process and provide the base for
project decision and implementation.

a. opportunities studies
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. An opportunity study should identify investment opportunities or project ideas
by analyzing the following factors in detail:
 Natural resources with high potential for processing and manufacture:
 Existing agricultural pattern that serves as a basis for agro-based industries:
 The future demand for certain consumer goods or for newly developed goods:
 Imports in order to identify areas for import substitution:
 Cost and availability of production factors:
 Possible expansion of existing industrial capacity to attain economies of scale and
 Export possibilities.
b. Pre-feasibility studies
A Pre-feasibility study should be viewed as an intermediate stage between a project opportunity
study and a detailed feasibility study. The main difference between the prefeasibility study and the
actual feasibility study is the degree of the detailedness of the information obtained and the
intensity with which project alternatives are examined. The structure of a prefeasibility study

9
should be the same as that of the detailed feasibility study. These two studies basically compile
the information on the justification of the project. In a practical sense, the main components of the
project feasibility report are:
 Executive summary
 Project back ground and history
 Market and plant capacity
 Location and site
 Project engineering works
 Factory, administrative and sale overheads
 Man power
 Project implementation
 Financial analysis and
 Project risk analysis
c. Support (Functional) studies
Support of functional studies cover some aspects of an investment project, and are required as
prerequisites for, or in support of pre-feasibility and feasibility studies of particularly large scale
investment proposals. The various aspects in support or functional studies include:
 Market studies of to be manufactured
 Raw materials inputs and factory supply studies laboratory tests location studies
 Environ mental impact assessment
 Economies of scale studies
 Equipment and technological selection studies
The contents of the support study vary, depending on the 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 the project preparation. In most cases, a support study when undertaken
either before or together with a feasibility study, from an integral part of the latter and lessen its
burden and cost.
d. feasibility studies
A feasibility study should provide all data necessary for making the 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 strengthen a project whose
back ground conditions and aims have been clearly defined, in terms of its control objective and
possible marketing strategies, the possible market share that can be achieved, the corresponding
production capacities, the plant location existing raw materials, appropriate technology and
mechanical equipment and, 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. The
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 in order not to
10
omit any essential part and its related cost. However, 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 the larger the project the more complex will be the information
required.
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 usually 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 if possible economic aspects a
B. Investment (implementation) phase
The investment or implementation phase of a project provides a 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:
 Technological 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 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 chiefly 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.
This stage covers the signing of contracts between the investor on the one hand, and the financing
institutions, consultants, architects and supplies 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
11
simultaneously with the construction stage, may prove very crucial for the expected growth of
productivity and efficiency in plant operations. Plant commissioning and start up is usually a brief,
but technically critical span in project implementation.

C. Operational Phase
The problem of the operational phase needs to be considered from both short and long term
viewpoints. The short term view relates to the initial or commencement of production when a
number of problems may arise concerning such matters as the application of production
techniques, operation of equipment or inadequate labor productivity owing to lack of qualified
staff and labor. Most of the 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 productions made at the pre-investment phase.
If such strategies and projections prove faulty and remedial measures will not only be difficult, but
may prove highly expensive.
The DEPSA Model
In Ethiopia, Development Project Studies Authority (DEPSA)made certain efforts and
developed a model for Project life cycle which is known as DEPSA’s Project life cycle. This life
cycle comprises three major phases. They are:
1. Pre-investment phase
2. Investment and
3. Operation
Each of these three phases may be divided into different stages.
The following is the summary of this classification of the project life cycle.
1. Pre- investment Phase
a. Identification Stage
b. Formulation Stage
 Pre-feasibility study
 Feasibility study
c. Appraisal
 Appraisal
 Decision
2. Investment Phase
 Implementation
 Tendering negotiation and contractual
 Detailed engineering design
 Construction, erection and commissioning

3. Operation Phase
 Operation
 Ex-post evaluation
12