Key Issues in Project Analysis

SWOT Analysis
Potential Market
Market Analysis
Market Share
Technical Viability
Technical Analysis
Sensible Choices
Risk
Financial Analysis
Return
Benefits and Costs in Shadow
Economic Analysis Prices
Other Impacts
 Feasibility Study
P Generation of Ideas
r
e
l
Initial Screening
i
m
i
Is the Idea Prima Facie Promising
n Yes No
a
r Plan Feasibility Analysis
y Terminate

W
Conduct Market Analysis Conduct Technical Analysis
o
r
k
Conduct Financial Analysis
E
A
v
n
a Conduct Economic and Ecological Analysis
a
l
l
u
y Is the Project Worthwhile ?
a
s
t Yes No
i
i
s
o Prepare Funding Proposal Terminate
n
Business Environment

Competitor
Key Steps in Market and Demand Analysis and their Inter-relationships

Collection of Demand
Secondary Forecasting
Information

Situational
Analysis and Characterisation
Specification of the Market
of Objectives

Conduct of Market
Market Survey Planning
 MARKET AND DEMAND ANALYSIS
• Situational analysis and specification of objectives
• Collection of secondary information
• Conduct of market survey
• Features of the market
• Demand forecasting
• Uncertainties in demand forecasting
• Market planning
 Situational Analysis

In order to get a “feel” of the relationship between the product and its
market, the project analyst may informally talk to customers,
competitors, middlemen, and others in the industry. Wherever possible,
he may look at the experience of the company to learn about the
preferences and purchasing power of customers, actions and strategies of
competitors, and practices of the middlemen.
 Collection of Secondary Information

◼ Secondary information is information that has been gathered in

some other context and is readily available.

◼ Secondary information provides the base and the starting point

for the market and demand analysis. It indicates what is known
and often provides leads and cues for gathering primary
information required for further analysis.
 Evaluation of Secondary Information
While secondary information is available economically and readily (provided the market
analyst is able to locate it), its reliability, accuracy, and relevance for the purpose under
consideration must be carefully examined. The market analyst should seek to know:

• Who gathered the information? What was the objective?

• When was the information gathered? When was it published?
• How representative was the period for which the information was gathered?
• Have the terms in the study been carefully and unambiguously defined?
• What was the target population?
• How was the sample chosen?
• How representative was the sample?
• How satisfactory was the process of information gathering?
• What was the degree of sampling bias and non-response bias in the information
gathered?
• What was the degree of misrepresentation by respondents?
 Market Survey

◼ Secondary information, though useful, often does not provide a

comprehensive basis for market and demand analysis. It needs to be
supplemented with primary information gathered through a market
survey.

◼ The market survey may be a census survey or a sample survey;

typically it is the latter.
 Information Sought in a Market Survey
The information sought in a market survey may relate to one or more of the
following:
• Total demand and rate of growth of demand
• Demand in different segments of the market
• Income and price elasticities of demand
• Motives for buying
• Purchasing plans and intentions
• Satisfaction with existing products
• Unsatisfied needs
• Attitudes toward various products
• Distributive trade practices and preferences
• Socio-economic characteristics of buyers
 Steps in a Sample Survey
Typically, a sample survey involves the following steps:

1. Define the target population.

2. Select the sampling scheme and sample size.
3. Develop the questionnaire.
4. Recruit and train the field investigators.
5. Obtain information as per the questionnaire from the sample
of respondents.
6. Scrutinise the information gathered.
7. Analyse and interpret the information.
 Features of the Market
Based on the information gathered from secondary sources and through
the market survey, the market for the product/service may be described
in terms of the following:

• Effective demand in the past and present

• Breakdown of demand
• Price
• Methods of distribution and sales promotion
• Consumers
• Supply and competition
• Government policy
 Methods of Demand Forecasting

I Qualitative Methods : These methods rely essentially on the judgment of experts to

translate qualitative information into quantitative estimates. The important
qualitative methods are :
• Jury of executive method
• Delphi method
II Time Series Projection Methods : These methods generate forecasts on the basis of
an analysis of the historical time series . The important time series projection
methods are :
• Trend projection –method
• Moving average method
III Causal Methods : More analytical than the preceding methods, causal methods
seek to develop forecasts on the basis of cause-effect relationships specified in an
explicit, quantitative manner. The important causal methods are :
• Chain ratio method
• Consumption level method
• Leading indicator method
 Corporate Appraisal

• Marketing and distribution

• Production and operations
• Research and development
• Corporate resources and personnel
• Finance and accounting
 The Questions Every Entrepreneur Must Answer
following are the question that every entrepreneur must answer:
Are my goals well defined?
• Personal Goal
• Business sustainability and size
• Tolerance for risk
Do I have the right strategy?
• Clear definition
• Profitability and potential for growth
• Durability
• Rate of growth
Can I executive the strategy
• Resources
• Organisational infrastructure
• The founder’s role
 Project Time line
• Manufacturing Process / Technology
• Technical Arrangements
• Materials and Inputs
• Product Mix
• Plant capacity
• Location and site
• Machineries and equipments
• Structures and Civil Works
• Environmental Aspects
• Project Charts and Layouts
• Project Implementation Schedule
• Need for Considering Alternatives
 Manufacturing Process/Technology
For manufacturing a product / service often two or more alternative
technologies are available . The choice of technology is influenced by a
variety of considerations:

Choice of Technology
The choice of technology is influenced by a variety of considerations
• Plant capacity
• Investment outlay and production cost
• Product mix
• Latest developments
 Technical Arrangements
Satisfactory arrangements must be made to obtain the technical know-how needed
for the proposed manufacturing process. When collaboration is sought, inter alia, the
following aspects of the agreement must be worked out in detail.

• The nature of support to be provided by the collaborators during the designing of

the project, selection and procurement of equipment, installation and erection of
the plant, operation and maintenance of the plant, and training of project
personnel

• Process and performance guarantees in terms of plant capacity, product quality,

and consumption of raw materials and utilities.
• The price of technology in terms of one time licensing fee and periodic royalty
fee.
• The continuing benefit of research and development work being done by the
collaborator.
• The period of collaboration agreement
 Material Inputs and Utilities
An important aspect of technical analysis is concerned with defining the
materials and utilities required, specifying their properties in some detail,
and setting up their supply programme.
Materials and utilities may be classified into four broad categories:

• Raw materials
• Processed industrial materials and components
 Product Mix

• The choice of product mix is guided by market requirements. In

the production of most of the items, variations in size and quality
are aimed at satisfying a broad range of customers.

• While planning the production facilities of the firm, some

flexibility with respect to the product mix must be sought.
 Plant Capacity

• Plant capacity (also referred to as production capacity) refers to the

volume or number of units that can be manufactured during a given
period. Plant capacity may be defined in two ways: feasible normal
capacity and nominal maximum capacity.

• Several factors have a bearing on the capacity decision:

• Technological requirement

• Market conditions
• Resources of the firm
• Governmental policy
 Location and Site

Location refers to a broad area; site refers to a specific piece of land.

The choice of location is influenced by a variety of considerations:

• Availability of infrastructure – materials and markets

• Labour situation
• Governmental policies
 Machineries and Equipment

• The requirement of machineries and equipment is dependent on

production technology and plant capacity. It is influenced by
the type of project.

• For a process-oriented industry, like a petrochemical unit,

machineries and equipments required should be such that the
various stages are matched well.

• The choices of machineries and equipments for a manufacturing

industry is somewhat wider.
 Structures and Civil Works
Structures and civil works may be divided into three categories:

• Site preparation and development

• Buildings and structures
• Outdoor works
 Plant Layout
The important considerations in preparing the plant layout are:

• Consistency with production technology

• Smooth flow of goods from one stage to another
• Proper utilisation of space
• Scope for expansion
• Minimisation of production cost
• Safety of personnel
 Schedule of Project Implementation
As part of technical analysis, a project implementation schedule is also
usually prepared. For preparing the project implementation schedule the
following information is required:

• List of all possible activities from project planning to

commencement of production.
• The sequence in which various activities have to be performed.
• The time required for performing various activities.
• The resources normally required for performing various activities.
• The implications of putting more resources or less resources than
are normally required.
 The Need for Considering Alternatives
There are alternative ways of transforming an idea into a concrete
project. These alternatives may differ in one or more of the
following aspects:

• Nature of project
• Production process
• Product quality
• Scale of operation and time phasing
• Location
 Key Project Inter-linkages

Product / Service

Demand

Size
Technology

Location

Selling Price
Production Costs

Financial
Requirements Investment
Outlay
Profitability
 Cost of Project
The cost of project represents the total of all items of outlay associated with a
project which are supported by long-term funds. It is the sum of the outlays on
the following:
• Land and site development
• Buildings and civil works
• Plant and machinery
• Technical know-how and engineering fees
• Expenses on foreign technicians and training of Indian technicians abroad
• Miscellaneous fixed assets
• Preliminary and capital issue expenses
• Pre-operative expenses
• Margin money for working capital
• Initial cash losses
 Means of Finance

To meet the cost of the project the following means of finance are

available:

• Share capital
• Term loans
• Debenture capital
• Incentive sources
• Miscellaneous sources
 Project Financing Decision
The key business considerations relevant for the project financing
decisions are:

• Cost
• Risk
• Flexibility
 Basic Considerations : Risk and Return

Investment
Return
decisions

Market value
of the firm

Financing
Risk
decisions
 Cost of Production

Given the estimated production, the cost of production may be worked

out. The major components of cost of production are:

• Material cost
• Labour cost
• Factory overhead cost
 Working Capital Requirement and Its Financing
In estimating the working capital requirements and planning for its financing,
bear in mind the following:

• The working capital capital requirement consists of raw materials and

components, work-in-process, finished goods, consumable stores,
debtors, and operating expenses.

• The principal sources of working capital finance are working capital

advances provided by commercial banks, trade credit, accruals and
provisions, and long-term sources of financing.

• There are limits to obtaining working capital advances from commercial

banks. They relate to the maximum permissible bank finance for
working capital and the amounts that can be raised against each
individual current asset.
 Profitability Projections (or Estimates of Working Results)
Given the estimates of sales revenues and cost of production, the next step is to prepare
the profitability projections or estimates of working results (as they are referred to by
term-lending financial institutions in India). The estimates of working results may be
prepared along the following lines:

A Cost of Production
B Total administrative expenses
C Total sales expenses
D Royalty and know-how payable
E Total cost of production (A+B+C+D)
F Expected sales
G Gross profit before interest
H Total financial expenses
I Depreciation
J Operating Profit (G - H - I)
K Other income
L Preliminary expenses written off
M Profit/loss before taxation (J+K - L)
N Provision for taxation
O Profit after tax (M - N)
Less Dividend on
- Preference capital
- Equity capital
P Retained profit
Q Net cash accrual (P+I+L)
Project Financing
 Financial Decisions and Investment

Financing Decisions Investment Decisions

 Basic Differences between Equity and Debt

Equity Debt
◼ Equity shareholders have a ◼ Creditors (suppliers of debt) have a
residual claim on the income and fixed claim in the form of interest
the wealth of the firm. and principal payment.
◼ Dividend paid to equity ◼ Interest paid to creditors is a tax
shareholders is not a tax deductible payment.
deductible payment.
◼ Equity ordinarily has indefinite ◼ Debt has a fixed maturity.
life.
◼ Equity investors enjoy the ◼ Debt investors play a passive role –
prerogative to control the affairs of course, they impose certain
of the firm. restrictions on the way the firm is run
to protect their interest.
 Key Factors in Determining the Debt - Equity Ratio

The key factors in determining the debt-equity ratio for a project are:

· Cost
· Nature of assets
· Business risk
· Norms of lenders
· Control considerations
· Market conditions
 Use more equity when Use more debt when

◼ Business risk exposure is high. ◼ Business risk exposure is low.

◼ control is not an important issue. ◼ control is an issue.

◼ The assets of the project are ◼ The assets of the project are mostly
mostly intangible. tangible.
◼ The project has many valuable ◼ The project has few growth options.
growth options.
 Sources of Finance

Sources of Finance

Internal Securities Term loans Working capital Miscellaneous

Accruals advances sources
• Equity
• Preference
 Internal Accruals

Internal accruals of a firm consist of depreciation fund and retained

earnings.
Pros

• Readily available
• No dilution of control

Cons

• Opportunity cost is high

 Equity Capital
Equity capital represents ownership capital as equity shareholders
collectively own the company. They enjoy the rewards and bear the risks
of ownership
• Authorized capital
• Issued capital
• Subscribed capital
• Paid-up capital
• Par value
• Issue price
• Market value
 Rights of Equity Shareholders

• Right to profit

• Right to Control

• Right to Vote
 Preference Capital

Preference capital represents a hybrid form of financing. It partakes some

characteristics of equity and some attributes of debt.

Equity Debt
◼ Dividend not an obligatory ◼ Interest rate is fixed
payment

◼ Dividend not a tax-deductible ◼ No voting right

 Preference Capital
Pros
• No legal obligation to pay dividends
• Enhances creditworthiness
• No dilution of control
Cons
• Skipping preference dividends adversely affects image
• Voting rights under certain conditions
 Features of Debentures

• Security
• Maturity
• Redemption
• Fixed rate vs. floating rate
Advantages and Disadvantages of Debt Financing
Advantages
• Tax Benefit
• No dilution of control
• Lower issue costs
• Debt servicing burden is generally fixed in nominal terms
Disadvantages
• Fixed interest and principal repayment obligation
 Methods of Offering

There are different ways in which a company may raise

finances in the primary market
• Public offering
• Rights issue
• Preferential allotment
 The IPO Process

From the perspective of merchant banking the IPO

process consists of four major phases:

Hiring of Agent, Registration, Verification by

SEBI, Advertisement and Allotment
 Term Loans

Term loans, also referred to as term finance, represent a source of debt

finance which is generally repayable in less than 10 years. The key
features of term loans relate to :
• Security
• Interest payment and principal repayment
• Restrictive covenants
 Working Capital Advances

• Cash credits / overdrafts

• Loans
• Purchase / discount of bills
• Letter of credit
 Miscellaneous Sources
• Lease and hire purchase finance
• Special schemes of institutions
• Subsidies
• Short term loans from financial institutions
• Commercial paper
• Factoring
 Raising Capital in International Markets

• World Bank, Unesco, ADB

• from various countries
 PUBLIC – PRIVATE PARTNERSHIP
INFRASTRUCTURE PROJECTS Features:

▪ High Capital Costs

▪ Steady Cash Flows
▪ Need for High Government Support
▪ High Regulation
▪ Highly “Contractual” Project Structures
▪ Multiple Risks
National Highway Development Programme (NHDP),
Bharat Nirman, Providing Urban services in rural areas
(PURA), Jawaharlal Nehru national Urban renewal
Mission (JNNURM), the Prime Minister’s rural road
Programme, national rail Vikas Yojana, national Maritime
Development Programme (NMDP), airport expansion
programme, development. the National Development
council (NDC)
• Public Investment Model
• Private Investment Model
• Public-Private Partnership Model (PPP)

Model of PPPs
Build-Operate-Transfer (BOT), Build-Own-Operate
(BOO), Build-Operate-Lease-Transfer (BOLT)

Major Problems with PPP

 TYPICAL PROJECT CONFIGURATION

◼ The project is implemented by a Special Purpose Vehicle, which is a distinct

corporate entity.
◼ Project sponsors take an equity stake in the SPV.
◼ The SPV enters into contractual arrangements with project contractors,
offtakers, operators, government, and project lenders.
◼ The dependence on debt is usually high and lenders generally lend on a non-
recourse basis. This means that project lenders would not have any fall-back on
the resources/assets of the sponsors if the SPV fails to meet debt servicing
obligations.
◼ The contracts are as ironclad as possible and are less left to subjective
interpretation as possible.
 KEY PROJECT PARTIES

• Project lenders
• EPC (engineering, procurement, and construction) contractor
• O & M (operations and maintenance) contractor
• Government
 INFRASTRUCTURE FINANCING SCENARIO IN INDIA
◼ Due to their complex nature, infrastructure projects have historically been funded by
banks and financial institutions, SBI, IDFC, ICICI, IDBI, and PFC being the key
financiers.
◼ In recent times, there has been an increasing interest from the capital markets in
financing equity requirements in well-structured infrastructure projects.
◼ Banks have become more responsive and are now willing to lend upto tenors of 12
to 20 years.
◼ A large part of the Golden Quadrilateral is based on a fixed annuity payment to
contractors on a build-operate-transfer (BOT) model.
◼ An operate-maintain-transfer (OMT) model is emerging for road financing. Under
this arrangement, the government funds the road while the contractor operates and
maintains it for a fee and then transfers it for a fee.
◼ There has been a fair amount of action in seaports in the last few years
◼ The Government of India has recently approved five ultra- mega power projects to
come up in the private sector.
◼ Telecom operators in the private sector have been funded by debt and equity, coming
in good measure from foreign sources.
 SOME SHORTCOMING IN INFRASTRUCTURE
MANAGEMENT
1. A rigid bureaucracy
2. A lack of ability or willingness to pay for good infrastructure
3. Unwillingness to pay for specialised knowledge
4. Inadequate training of operating personnel
5. Lack of process and method
6. Inappropriate sharing of risks
Project Time Management Processes
• Planning schedule management: determining the policies, procedures, and
documentation that will be used for planning, executing, and controlling the
project schedule
• Defining activities: identifying the specific activities that the project team
members and stakeholders must perform to produce the project deliverables
• Sequencing activities: identifying and documenting the relationships between
project activities
• Estimating activity resources: estimating how many resources a project team
should use to perform project activities
• Estimating activity durations: estimating the number of work periods that are
needed to complete individual activities
• Developing the schedule: analyzing activity sequences, activity resource estimates,
and activity duration estimates to create the project schedule
• Controlling the schedule: controlling and managing changes to the project
schedule

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Planning Schedule Management
The project team uses expert judgment, analytical
techniques, and meetings to develop the schedule
management plan

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Defining Activities
• An activity or task is an element of work normally found
on the work breakdown structure (WBS) that has an
expected duration, a cost, and resource requirements
• Activity definition involves developing a more detailed
WBS and supporting explanations to understand all the
work to be done so you can develop realistic cost and
duration estimates

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Activity Lists and Attributes
• An activity list is a tabulation of activities to be included
on a project schedule that includes
• the activity name
• an activity identifier or number
• a brief description of the activity
• Activity attributes provide more information such as
predecessors, successors, logical relationships, leads and
lags, resource requirements, constraints, imposed dates,
and assumptions related to the activity

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Sequencing Activities
• Involves reviewing activities and determining
dependencies
• A dependency or relationship is the sequencing of
project activities or tasks
• You must determine dependencies in order to use
critical path analysis

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Three types of Dependencies
• Mandatory dependencies:
• Discretionary dependencies:
• External dependencies:

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Network Diagrams
• Network diagrams are the preferred technique for
showing activity sequencing
• A network diagram is a schematic display of the
logical relationships among, or sequencing of,
project activities

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Task Dependency Types
Task dependency Example Description
Finish-to-start (FS) A diagram of a box labeled A in the top left Task (B) cannot start until task (A) finishes.
corner and a box labeled B in the bottom
right corner. An arrow points from the right
side of box A to the top side of box B.

Start-to-start (SS) A diagram of a box labeled A above a box Task (B) cannot start until task (A) starts.
labeled B. Box B is more aligned to the
right. An arrow points from the left side of
box A down towards the left side of box B.

Finish-to-finish (FF) A diagram of a box labeled A above a box Task (B) cannot finish until task (A) finishes.
labeled B. Box B is more aligned to the left.
An arrow points from the right side of box A
and down to the right side of box B.

Start-to-finish (SF) A diagram of a box labeled A in the top Task (B) cannot finish until task (A) starts.
right corner and a box labeled B in the
bottom left corner. An arrow points from
the left side of box A to the right side of box
B.

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Estimating Activity Resources
• Before estimating activity durations, you must have a
good idea of the quantity and type of resources that
will be assigned to each activity; resources are
people, equipment, and materials
• Consider important issues in estimating resources
• How difficult will it be to do specific activities on
this project?
• What is the organization’s history in doing similar
activities?
• Are the required resources available?
• A resource breakdown structure is a hierarchical
structure that identifies the project’s resources by
category and type

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Three-Point Estimates
• Instead of providing activity estimates as a discrete
number, such as four weeks, it’s often helpful to create a
three-point estimate
• an estimate that includes an optimistic, most likely,
and pessimistic estimate, such as three weeks for the
optimistic, four weeks for the most likely, and five
weeks for the pessimistic estimate

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Developing the Schedule
• Uses results of the other time management
processes to determine the start and end date of
the project
• Ultimate goal is to create a realistic project
schedule that provides a basis for monitoring
project progress for the time dimension of the
project
• Important tools and techniques include Gantt
charts, critical path analysis, and critical chain
scheduling, and PERT analysis

77
Gantt Charts
• Gantt charts provide a standard format for displaying
project schedule information by listing project
activities and their corresponding start and finish
dates in a calendar format

78
Critical Path Method (CPM)
• CPM is a network diagramming technique used to predict
total project duration
• A critical path for a project is the series of activities that
determines the earliest time by which the project can be
completed
• The critical path is the longest path through the network
diagram and has the least amount of slack or float
• Slack or float is the amount of time an activity may be
delayed without delaying a succeeding activity or the
project finish date

79
Calculating the Critical Path
• First develop a good network diagram
• Add the duration estimates for all activities on each
path through the network diagram
• The longest path is the critical path
• If one or more of the activities on the critical path
takes longer than planned, the whole project
schedule will slip unless the project manager takes
corrective action

80
Determining the Critical Path for Project X

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