PROJECT CYCLE

SECOND Presentation
The Project Analysis or appraisal is done in
stage (Cycle) and should provide information
on:
- administrative feasibility, marketing,
and technical appraisal;
- financial capability;
- expected economic contributions,
- social objectives

The following are various expressions of the

stages of the project cycle
Gittinger (1996 )
In his book Economic Appraisal of Agricultural projects
defines the cycle to be:-
• Identification
• Preparation and analysis
• Appraisal
• Implementation
• Evaluation
Project Management Institute (PMI)
A Professional Institute coins the cycle in
terms of:
• Initiating
• Planning
• Executing
• Controlling
• Closing
 Patel (2000)
• Concept
• Planning
• Execution
• Termination
Keeling Ralph (2000) In his book Project
Management: An International Perspective
states the project cycle to have the
following stages
• Conceptualisation
• Planning
• Implementation (execution)
• Termination
The Asian Development Bank Project cycle
model
 World Bank Model of the project
cycle
• Identification
• Preparation
• Appraisal
• Promotion, Negotiations, Board
presentations
• Implementation and supervision
• Evaluation
World Bank
 Phases of the project cycle – UNIDO manual

Phase 1 – Pre-investment

Opportunity Prefeasibility Feasibility Appraisal &

study study Study Decisions

Phase 2 – investment

Construction Commissioning
Negotiation and Engineering & Manpower
Contracting Design & start up
training

Phase 3 – Operation

Phase 4 – Evaluation
 Pre-investment Studies
• Careful study of the prospects for success of an
industrial or commercial venture has not been the
rule throughout the world since the industrial age.
• Even in the industrialized countries direct
investment is often undertaken in haste, avoiding
the trouble and cost of investigation, but increasing
the risk of failure.
• There are four Phases to the Pre-investment
Studies
• Opportunity study
• Pre-feasibility study
• Feasibility study
• Appraisal decisions
Opportunity study
The Objectives of the opportunity study :
• Conduct refinement of business idea
• Conduct preliminary evaluation of
alternative approaches
• Conduct preliminary assessment of
strengths and weaknesses of the concept
Characteristics of the study:-
Sketchy type based more on rough aggregate
estimates than on detail analysis
Pre-feasibility study
The Objectives of conducting a prefeasibility
study are:
• Conduct Preliminary project assessment
• Identify project alternatives
• Identify critical aspects that require special
support studies such as project's design -
product, technology, marketing and
distribution, capital structure.
Characteristics of the study:-
• Intermediate level of detail based primarily
on secondary data
Feasibility study
The Objectives of conducting a feasibility study
are:
• Provide commercial, technical, financial, and
economic information needed for investment
decision making
Characteristics of the study:-
• Clear project concepts and criteria
• Comprehensive project design
• Reliable information often primary data
• Quantified prediction of performance
• Detail analysis with high confidence level
• Consistent and defensible conclusions
• Selection criteria
Support Studies
The Objectives of conducting a feasibility
study are:
• Provide detailed technical analysis of
critical design features
Characteristics of the study:-
• Highly focused and Limited scope
• Performed by technical experts
• Answers key questions
• Degree of rigor(strictness)
commensurate(proportionate) with
stage of project development
Support Studies cont…
Types of support studies
• Markets:- An innovative product may require
scientifically based test marketing.
• Inputs :- Vital inputs, whether of domestic or foreign
origin, may require studies of reliability of supply and
price.
• Location :- Location of the production and
distribution facilities may require special multi-criteria
optimization studies.
• Technology :- Capital versus labor intensive
alternatives or the degree of automation can be a
selection factor.
• Equipment :- Equipment may require special testing if the
design specifications do not correspond to actual
operating conditions.
TARGET PRECISION IN PRE-INVESTMENT
STUDIES IN PERCENTAGE OF TOTAL
INVESTMENT AND PRODUCTION COSTS
The development of an investment opportunity
generally progresses through stages in which the
project is increasingly refined in terms of configuration
and the accuracy and precision of information and
predicted results.

The combination of accuracy (systematic error) and

precision ("random" error) is estimated at
• +/- 30% for Opportunity studies
• +/- 20% for Prefeasibility studies and
• +/- 10% for Feasibility studies
COST RANGE OF PRE-INVESTMENT STUDIES -
APPROXIMATION IN PERCENTAGE OF TOTAL
INVESTMENT COSTS
• As the project progresses from conception
through increasingly more definitive stages of
development the depth of the study would
increase accordingly.
• Greater accuracy and precision implies greater
cost.
• The total cost of study through the feasibility
level for a large project might be 1.8% comprised
of :-
• Opportunity Study - 0.3 %,
• Pre Feasibility Study - 0.5%,
• Feasibility Study - 1.0%.
Project Identification
• Initial step of the project cycle,
• This is the birthplace of the project.
• Needs precede projects i.e, the first step in
identifying a project is to identify a need
Project Identification Cont…
The project identification process involves the
following steps:-
Conduct SWOT Develop
analysis selection criteria

Profile readily Screen ideas

Scan source
available data Vs criteria
of ideas

No
• Reject Yes
Further
• Rework Acceptable
Study
• Later
reconsider
SWOT Analysis
Strengths
Weaknesses
Opportunities
Threats
Opportunities Vs Threats
Economic Growth Regulatory Change
Growth Industrial sectors Political Change
New Markets Change in Image
Regulatory change Recession
Political Change Decline in resources
 Desirable Strengths
Market place Existing industry
Labor availability Financing
Premises and sites Quality of Life
Communications Availability of resources
Suppliers Stability
Sources of Project ideas
Demand : Unsatisfied demand and the most
effective ways to meet it.
Linkages:- Need for Upstream and downstream
linkages, i.e. vertical integration - currently procured
inputs or products for which the current enterprise is
a supplier.
Sources of Project ideas …..
Problems :- Problems/constraints in the development
process due to shortages of essential facilities,
services and materials.
Resources :- Availability of resources cause for ideas
Development :- Need to complement development
with support services, infrastructure, etc.
Trade :- Possibilities for import substitution and export
potential
Technology :- New developments offer ideas,
particularly in regard to modernization projects.
Sources of Project ideas ….
Government Policy :- Incentives to entrepreneurs –
tax holidays, subsidies, grants for development in
sectors or regions and planned allocation, although
this should not be the sole basis for embarking on a
business venture.
External Constraints:- External constraints lead
government planners to adopt policies of self –
sufficiency in food production, energy generation or
other goods and Services.
INFORMATION ROUTES and TYPES OF
STUDIES
Some types of studies that can illuminate the potential
for industrial investment are the following:
• National and Regional Development plans
• situational reports on sectors
• Local Resource studies
• Study other countries experience – The “me – too”
approach
• Review products classification lists for shortage
• review of existing projects
• country reports.
• Media reports
• Survey on feedback from customers and
• market surveys may disclose needs.
SCREENING PROJECTS
Some of the criteria that could be included in the screening
scheme are as follows:
• Size and Growth of markets – Must be reliably
adequate to justify investment.
• Availability of Local resources – In terms of quantities,
qualities and acceptable prices
• Minimum and maximum Plant Size – economically
acceptable range for project
• Appropriate Technology- available and compatible
• Size of Investment - within range that can be managed
by investors
• Estimated Financial Indicators – acceptable according
to criteria, e.g. cost of capital
• Requirements and Constraints - any thing that prevent
implementation or operations
Screening Criteria
The parties or agents involved in a project each
determine their own criteria according to their
priorities (promoter, investor, financier, guarantor,
government).
Overriding all criteria is the element of risk and is of
concern to all
Investment promotion agency:
• Development goals of the country or the region
which may be related to issues of security, economic
growth, political stability may be a cause for
prioritizing projects
• Also socio-economic or distribution effects of the
project may be an important criterion
Screening Criteria cont…
Investor:
• Projected profitability - higher return is
better; Payback
• growth potential - an expanding market
and general economic prosperity;
• magnitude of investment – the project
investment must match the capital
constraints of the investor;
• risk - tolerance to risk varies by investor.
Screening Criteria Cont…
Lender:
• Banks and other financial institutions sometimes do
opportunity studies and screen the resulting
investment ideas to assess the structure of their loan
portfolios.
Criteria would include:
• conformance to development objectives or with
institutional experience;
• likelihood of default in servicing debt;
• client relations (interests of preferred clients);
• magnitude of investment (if the investment is too
large for the financier to handle, syndication may be
an option, if too small, the cost of administering the
loan may be too great.
PROJECT SELECTION
Projects meeting screening criteria are selected for
further study.
Other options are:-
Reject: Some of the projects not acceptable at the
present time would be rejected as unworkable.
Rework: Projects that need some refining of major
features before serious consideration.
Consider later: Projects that are not currently timely
but have a potential at future
 WHAT CONSTITUTES A BUSINESS
OPPORTUNITY?
A genuine business opportunity exists when the basic
framework (Both micro and macro factors) for
successful operation are either in place or achievable.
Micro elements:
Business concept: Involves the identification of a product or
service, a strategy for marketing and distribution.
Investors: Most projects require investors willing and able to
provide the necessary equity.
Market: People willing and able to buy have to be identified.
Resources: Resources must be available as needed for
proper functioning of the enterprise - managerial capacity and
other labor; financial facilities; raw materials and intermediate
goods and services; a technology appropriate to the
environment; land in a suitable location.
Macro elements:
Business climate: The general business
climate should be favorable (Conducive Macro -
Micro Investment Climate).
Business cycle: The state of the particular
business cycle should be favorable.
Economic trend: Growing GDP and national
income is encouraging for business entry. A
state of secular economic decline in the country
or region would not promise well for a
new business entrant.
KEY ASPECTS OF PROJECT IDENTIFICATION
The following are some:
Concentrate on best prospects: Focusing attention on
a limited number of project ideas is a better way to
assure that pitfalls are avoided at early stage

Quick negative decision better than delay:

Particularly where there is a sufficient array of project
ideas, it is better to quickly reject, or at least recycle,
ideas that present difficult obstacles from the outset.
Assure commitment of potential sponsor to
implementation:
PROJECT PREPARATION
Project preparation is the study of an investment
opportunity.

The general methodology of conducting such an

investment study (the preparation process) involves the
following:
Set study limits: Develop TOR Estimate performance indicators:
Design the project: Assess risks:
Collect information: Test feasibility:
Determine a project configuration: Select optimal configuration:
Study the project in its environment: Provide recommendations:
Analyze results of study:
MAIN ELEMENTS OF PROJECT PREPARATION
Gittinger (1996) Identifies aspects of project
preparation and analysis to be the
following:
– technical aspect,
– institutional-organisational-managerial
aspects,
– social aspects,
– commercial aspect,
– financial aspect
– economic aspect.
 PROJECT PREPARATION Cont…
Glenn P. Jenkins and Arnod C. Harberger Classify
Public sector project preparation components in to six
modules. These are:
1. Marketing or Demand Module : In Which the demand
for the goods and services and prices or the relative
needs of social services are estimated, quantified,
and justified
2. Technical or Engineering Module:- in which the input
parameters of the project are Specified in detail and
cost estimates developed
3. Manpower and Administrative support Module in
which manpower requirements are specified for the
implementation as well as the operation of the project
and sources of manpower identified and quantified
 PROJECT PREPARATION Cont…
4. Financial/Budget Module:- In which the financial
expenditures and revenues are evaluated along
with an assessment of the alternative methods of
financing
5. Economic Module:- In which the economic
adjustments' are made to the financial data and the
project’s costs and benefits are appraised from the
view point of the economy
6. Social module:- In which the project is appraised
from the point of view of who receives the benefits
and who pays the costs of the project. Where
possible a quantification should be made to
determine by how much each of these groups
benefits or pays
 MAIN ELEMENTS OF PROJECT PREPARATION
The UNIDO manual states the following to be the project
preparation steps
Market analysis
Technical analysis
Financial Analysis and
Economic analysis
Market analysis: Involves conducting market
assessment and developing market strategy
Technical analysis: Engineering and other technical
parameters of the project need to be clearly defined.
These are:
• ENGINEERING AND TECHNOLOGY:
• LOCATION, SITE AND ENVIRONMENT:
• RAW MATERIALS AND SUPPLIES:
• HUMAN RESOURCES:
• ORGANIZATION AND OVERHEAD:
• IMPLEMENTATION PLANNING:
 MAIN ELEMENTS Cont..
Financial analysis: Financial analysis is a
simulation of the investment from the financial point of
view. The Analysis Includes:-
INVESTMENT COSTS:
PRODUCTION COSTS:
FINANCE:
INDICATORS OF FINANCIAL PERFORMANCE:
Static indicators
Dynamic Indicators
FINANCIAL CRITERIA:
Commercial benefits are measured in regard to
revenues or profits.
Commercial costs are the prices of factors of
production.
Economic analysis
Economic (Shadow) Prices: Constraints in the economy
may result in values of project inputs and outputs that differ
from commercial or market prices.
Benefits and costs: Economic benefits are measured in
terms of resources made available to the society. Economic
costs are measured in terms of opportunity foregone when a
resource is applied to the project.
Externalities: In the wider domain the associated impacts of
the project upon the economy and physical and social
environments are included in the analysis.
Social factors: How a project conforms to social policy in
terms of distribution of the region or country's resources is a
consideration in this type of analysis.
Criteria : Rather than focus on the 'top' or 'bottom' lines,
net consumption, distribution and other benefits to society are
criteria that are applied in economic analysis.