Mekdela Amba University

College of Agriculture and Natural Resources

Department of Agricultural Economics
Agricultural Project Planning and Analysis
Handout for 4th Year AgEc Students

Chapter One: Introduction

1.1. The Project Concept
Project planning and analysis has a long history in financial and business analysis. Project
planning has always been used as a means of checking the profitability of a particular
investment by private firms. Recent experiences show that project analysis has attracted the
attention of development economists. Projects are now assessed from the economy’s
viewpoint instead of only from the firm’s perspective. The selection criteria have also
included economic criteria on top of financial criteria.

Perhaps the most difficult problem confronting administrators in developing countries is

implementing development programs. Much of the failures can be traced to poor project
preparation. Especially from development viewpoint, for most development activities careful
preparation in advance of expenditure is, if not absolutely essential, at least the best available
means to ensure efficient, economic use of capital funds and to increase the chances of
implementation on schedule. Unless projects are carefully prepared in substantial details,
inefficient or even wasteful expenditure is almost sure to result – a tragic loss in nations short
of capital.

1.2. What is project

Project can be defined as an investment activity in which financial resources are expended to
create capital assets that produce benefits over an extended period of time. A project is a
complex set of activities where resources are used in expectation of return and which lends
itself to planning, financing and implementing as a unit.
The basic characteristics of capital expenditure (also referred to as a capital investment or
capital project or just project), is that it typically involve current outlay (or current and future
outlays) of funds in the expectation of a stream of benefits extending far into the future.

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Capital investment decisions often represent the most important decisions taken by the firm
or other decision maker. Capital investment decisions have far reaching impact into the
future. They are also characterized by irreversibility. Thus, a wrong capital investment
decision often cannot be reversed without incurring substantial loss. They also involve
substantial outlay of capital.
1.3. The linkage between projects and programs
It is necessary to distinguish between projects and programs because there is sometimes a
tendency to use them interchangeably. While a project refers to an investment activity where
resources are used to create capital assets, which produce benefits over time and has a
beginning and an end with specific objectives, a program is an ongoing development effort or
plan which may not necessarily be time bounded. Examples could be a road development
program, a health improvement program, a nutritional improvement program, a rural
electrification program, etc. A development plan is a general statement of economic policy.
National development plans are further disaggregated into a set of sectorial plans.

A development plan or a program is therefore a wider concept than a project. It 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 a construction of health centers both aimed at improving the
health of a given community, which previously lacked easy access to these essential facilities.
Projects, which are not linked with others to form a program, are sometimes referred to as
“stand alone” projects.

Projects in such context are the concrete manifestations of the development plans in a specific
place and time. One can think of projects as subunits and bricks of programs, which
constitute the national plan (usually the direction is from plans to projects). We have to note
that projects could be either public or private. It is the smallest operational element prepared
and implemented as a separate entity in a national plan or program.

From the above discussion it can be seen that the major difference between a project and a
program is not so much in objectives stated but lies more in scope, the details and accuracy.
A project is designed with a high degree of precision and details as regards its objectives,
features, calculation of returns and implementation plan. A program by contrast is general,

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lacks details and precision and aims at a broader goal often related to a sectoral policy of a
country or departmental policy of an organization.

Perhaps the distinction between projects and programs would be clear if we see the basic
characteristics of projects. Projects in general need to be SMART.
S – Specific
A project needs to be specific in its objective. A project is designed to meet a specific
objective as opposed to a program, which is broad. A project has also specific activities.
Projects have well defined sequence of investment and production activities and a specific
group of benefits. A project is also designed to benefit a specific group of people.
M - Measurable
Projects are designed in such a way that investment and production activities and benefits
expected should be identified and if possible be valued (expressed in monetary terms) in
financial, economic and if possible social terms. Though it is sometimes difficult to value
especially secondary costs and benefits of a project, attempt should be made to measure them.
Measure costs and benefits must lend themselves for valuation and general projects are
thought to be measurable.
A – Area bounded
As projects have specific and identifiable group of beneficiaries, so also have to have
boundaries. In designing a project, its area of operation must clearly be identified and
delineated. Though some secondary costs and benefits may go beyond the boundary, its
major area of operation must be identified. Hence projects are said to be area bounded.
R – Real
Planning of a project and its analysis must be made based on real information. Planner must
make sure whether the project fits with real social, economic political, technical, etc
situations. This requires detail analysis of different aspects of a project.
T – Time bounded
A project has a clear starting and ending point. The overall life of the project must be
determined. Moreover, investment and production activities have their own time sequence.
Every cost and benefit streams must be identified, quantified and valued and be presented
year-by-year.

1.4. The Importance of Project Planning

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The purpose (goals) to a project depends on the nature of the project. Development projects
(usually undertaken by government or NGOs) may have the following objective
.  Projects are very powerful and efficient means to achieve development (growth), rightly
called ‘cutting edge’ of development.
 They are mechanisms for improving income distribution (as government policy
instrument). Ex. implementing a project that enhances the income of the poor people to
benefit the poor,
 They are mechanisms to solve immediate problems.
Ex implementing a project to solve a specific problem in the society such as project to
eradicate malaria, prevent the spreading of HIV, Project undertaken by business organization
have a primary objective of maximizing the wealth of current shareholders. Other objectives
may include maximization of profit, maximization of earning per share or maximization of
return on equity.

Chapter 2: Aspects of Project Preparation and Analysis

The project analyst must consider several aspects when carrying project analysis. The major
aspects of project preparation and analysis are outlined below:

2.1. Technical Aspects

This aspect may include the works of engineers, soil scientists and agronomists in case of,
say, agricultural projects. The technical analysis is concerned with the projects inputs
(supplies) and outputs of real goods and services and the technology of production and
processing. It is analysis of the technical and engineering aspects of a project to be done
continuously when a project is formulated. Technical analysis seeks to determine whether the
prerequisites for the successful commissioning of the project have been considered and
reasonably good choices have been made with respect to location, size, process, etc. It is from
this aspect analysis that all physical quantity of inputs and outputs will be determined for the
estimation of costs and benefits.

Poor technical analysis will result in under- or over- estimation of quantities related to inputs
required by and outputs of the project. Further analysis based on these estimates would
eventually lead to spurious cost and benefit estimates. Care must also be taken in assessing
alternative designs and techniques. The project’s expected life time must also be determined

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carefully for it has greater implication on its overall analysis and preparation. All these
require creative, committed and competent specialists from different fields. It also requires
coordination among these specialists, as every technical aspect is interrelated and interacting.
In general the technical analysis is primarily concerned with
 Material inputs and utilities
 Manufacturing process and technology
 Product mix
 Plant capacity
 Location and site
 Machines and equipment
 Structure and civil works
 Project charts and layouts
 Work schedule
2.2. Commercial /Demand and Market/ Aspects
This aspect analysis needs to ensure the existence of effective demand at remunerative price.
It also assesses possible means in which the market will absorb the output without affecting
the output price and if it price inevitably be affected, we would have to assess its magnitude.
Similar arrangements need to be done on the input side too (including procurement of
equipment and intermediate input supplies).
Market analysis is basically concerned with two questions:
1. What would be the aggregate demand of the proposed product/service in future?
2. What would be the market share of the project under appraisal?
To answer the above two questions the project analyst requires a wide variety of information
and need to use appropriate forecasting methods. The kinds of information required are:
1. Consumption trends in the past and the present consumption level
2. Past and present supply positions
3. Production possibilities and constraints
4. Imports and exports
5. Structure and competition
6. Cost structure
7. Elasticity of demand
8. Consumer behavior, intentions, attitudes, preferences, and requirements
9. Distribution channels and marketing policies in use

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 10. Administrative, technical, and legal constraints.
All aspects related to demand and supply of inputs and outputs must be examined.

2.3. Institutional-Organizational-Managerial Aspects

Project analysis must make a detail analysis of project organization and management. This
analysis aims at answering the following questions:
 Is the organizational set-up of the project adequate?
 Will the project be provided with competent personnel to manage it?
The first question is about the proposed organization chart of the implementing agency. The
latter question aims at ensuring that adequate project staff can be recruited locally or
overseas. The problem of project staffing raises many other questions:
 Is local manpower market enough to provide the project with the required manpower?
 Can competent staff be recruited freely?
 Should they be recruited locally or overseas?
But even if the right staff is available, their success will depend mostly on the institutional
set-up i.e., the relationship between the various organizations involved with the implementing
agency. Appraising organization therefore includes appraisal of the project related institutions
like subsidiary companies, ministries, headquarters, banks, transport companies and others.
 What are the regulations or procedures?
 What are the policies – that favor and disfavor the project?
Once the right institutions to facilitate project implementation are available, the project
should be implemented by competent, responsible and committed managers. This requires
arrangement of adequate incentives to attract competent managers. Managerial appointment
should be a function of competence and commitment, not a function of race, tribe, creed or
political opinion.
2.4. Financial Aspects
Financial analysis seeks to ascertain whether the proposed project will be financially viable in
the sense of being able to meet the burden of servicing debt and whether the proposed project
will satisfy the return expectations of those who provide the equity capital. Here the project
analyst is concerned with the financial effects of the proposed project on each of its various
participants (firms, farmers/workers, government etc.). By examining the financial
implications of the project for these parties, the analysts need to identify the projects financial

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efficiency, incentive impact to the participants in the project, creditworthiness and liquidity
(say, could the firm have enough working capital?).

The financial analysis establishes the magnitude of costs of investment, production and
overheads and magnitude of benefits. This analysis will be the basis for evaluating the project
profitability. Project profitability depends on a comparison of costs versus revenues using
realistic market prices of materials, labor and outputs.
The aspects, which have to be looked into while conducting financial appraisal, are:
1. Investment outlay and costs of the project
2. Means of financing; source of finance, credit terms, interest rates, etc
3. Cost of capital
4. Projected profitability
5. Break-even point
6. Cash flows of the project
7. Investment worthiness judged in terms of various criteria of merit
8. Projected financial position
9. Level of financial risk
Financial analysis must generate future financial statements such as income statement,
balance sheet and uses-and-source-of-fund statement. After these statements are produced,
analysts can undertake different financial ratio analysis so as to ascertain financial feasibility.
The financial analysis must clearly show fund flows in each period in the project life.

2.5. Economic Aspects

The economic aspect of project preparation is primarily concerned with the determination of
the likelihood of the proposed project, and hence the committing of scares resources, by
justifying the significance of the project from the whole economy point of view (the society
as a whole). In such evaluation the focus is on the social costs and benefits of a project, which
may often be different from its monetary or financial costs, and benefits. The financial
analysis views the project form the participants (or owners) point of view, while the
economic analysis form the society’s point of view.
Decision makers here are concerned about the investment of scarce capital and other
resources that will best further national objectives. This is true whether the resources
committed are being invested by government directly or by individuals within the economy.

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While financial analysis uses projected market prices to value inputs and outputs, economic
analysis uses ‘economic prices’ or ‘shadow prices’ or ‘efficiency prices’ to better
approximate the opportunity costs of an input – the amount the economy must give up if the
resource is transferred from its present use to the project. Similarly, to value project’s output,
economic analysis uses the marginal value of a given output to approximate the real value –
the value that consumers place on that commodity. Thus economic analysis requires
adjustment of market prices, which may not reflect the real value of resources and outputs,
into economic prices. It also requires determination of economic prices of those goods that
might not have market prices but that involve commitment of real resources. The mechanics
of adjusting market prices into economic prices will be discussed in detail in the later chapter.
2.6. Social Aspects
Project analysts are also expected to examine the broader social implications of the proposed
project. Although the economic analysis will determine the amount of income stream
generated over and above the costs of labor and other inputs, it does not specify who actually
receive it and hence it does not the issue of income distribution. So the social aspect analysis
should address the income distribution implications of a project. Other closely related aspects
as employment opportunities, gender aspects, stimulating or competing effects with other
sectors, and other desired objectives must be considered.
2.7. Environmental aspect analysis
In recent years environmental concerns have assumed a great deal of significance. In most
developed countries and for projects financed by foreign donors in developing countries, an
environmental impact assessment is a prerequisite for project financing. Environmental
impact of a project refers to the effect of a project on the world of animals, plants, water, air,
and humans existing in the project area. Ecological analysis should be done particularly for
major projects, which have significant ecological implications like power plants and
irrigation schemes, and environmental polluting industries. In such projects environmental
impact assessment is important because economic benefits that may be generated from the
project can be counter-balanced by undesirable environmental effects. The key questions
raised in ecological analysis are:
 What is the likely damage caused by the project to the environment?
 What is the cost of restoration measures required to ensure that the damage to the
environment is contained within acceptable limits?

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