CHAPTER 1

BASIC CONCEPTS

1.1 Project concept

What is it?
 Project is a set of inter-related tasks that are undertaken by an organisation to meet defined
objectives that have an agreed start and finish time. Is constrained by cost and has specified
performance requirements and resources.
 A unique set of co-ordinated activities, with definite start and finish points, undertaken by an
individual or organisation to meet specific objectives within defined schedule, cost and performance
parameters.
 Project reflects a specific activity with a specific starting and ending point aimed to accomplish a
specific objective.
 In this course project refers to an agricultural investment activity upon which resources are expended
to create capital assets that will produce benefits over an extended period of time, thus logically
lends itself to planning, financing and implementation.

What is it for?
 This is unique at the details level: but is always about delivering change. The deliverable(s) may be
physical or logical objects, (or occasionally other things such as events or activities) and will include
information

1.1.1 Features of a project

 Projects come in many forms, shapes and sizes. A common feature of all types of project is that they
have an objective, or objectives, which is to be achieved in a specified period of time.
 It is only through considering the features of a project that we can have a clear understanding of
what a project is and is not.
 In describing a project there are four basic features to consider
o Goals and objectives;
o Time;
o Scale; and
o Type.

Objectives (Goals, purpose, and output)

 A project has a number of objectives (purpose and outputs), which are to be achieved during its
implementation, by achieving these, a project will contribute to achieving an overall higher objective –
the project goal.

Time
 A project will have a finite length during which it should achieve its objectives, the benefits of which
should last and be sustained after completion of the project.

Scale
 Projects operate at different levels or scales, ranging from very small (individual or household) to big
national and international level.
 Type
 Projects can be characterised by what output they are expected to give rise to, or what focus the
project has. This will be related to the scale of the project and the kind of enterprise the project is
tackling.
Example;
o Infrastructure and capital development projects
o Training projects
o Capacity building and institutional strengthening projects
o Agricultural projects, e.g. irrigation projects, inputs subsidies projects.

1.1.2 Basis of projects

A distinction can be made between demand and need based projects.

Demand based projects:
 A demand-based project is one, which satisfies a particular demand. In agricultural sector for
example, demand fro a product is usually reflected in terms of: -
o Consumer demand for agricultural products
o Export opportunities
o Demand for agricultural inputs into agro-Industry.

Need based projects:

 Need based projects are an important element in development of different areas.
 Sometimes development may be promoted in relatively poor area as means of increasing income
earnings opportunities and poverty alleviation.
 Promotion of projects oriented toward particular target group (women, or under-privileged ethnic
minorities) can also be need based although such projects are usually expected to be self-sustaining.

1.1.3 Project funding

 The implementation of a project will almost always require some additional finance to purchase
inputs and services.
 This will be in addition to other human and institutional resources the project needs
 For agricultural projects in Tanzania there are five main sources of finance for projects, these are: -
o Government recurrent national budget
o Multi-lateral and bilateral donor grants
o Multi-lateral and bilateral loans
o Beneficiary contribution
o Cost recovery

 Some projects will be reliant upon only one of the above-mentioned sources, but many projects rely
on several of these sources.

National budget:
 To many agricultural projects in the country national budget is the principal source of funding. This
will fund the everyday recurrent activities of government agencies such as Tanzania Fertilizer
Company (TFC).
 At present the government has reduced it‟s funding to agricultural projects relying most on multi-
lateral grants and loans from donor and multi-lateral organisations.
 Grants:
 Grants are usually made to supplement national funds and will usually be provided for a short period
of time (two to three years).
 Grants are usually given to fund additional costs not normal or recurrent expenditures.
 Size of grants vary considerably and some can be quite large up to several millions US dollars.
 A common feature of donor grants is that the recipient will have to follow a procedure of the donor to
develop and submit a proposal and the project will have to fall within the criteria that the donor has
established on their own.

Loans:
 Projects can be funded under loans. They can be straightforward commercial bank loans or credit
facilities to a small farm for a project on his or her farm to develop a crop.
 Loans to the government by development banks are more common. E.g. World Bank (WB), Africa
Development Bank (ADB) and East Africa Development Bank (EADB).
 These loans (from development banks) are often given on favourable terms to less developed
countries. They are favourable in terms of reduced interest rates and long term of repaying. They are
also known as soft loans as compared to hard loans from commercial banks.

Beneficiaries‟ contribution:
 Project beneficiaries can range from small to large depending on their proportion of contribution
towards the project
 Beneficiary contributions are more likely to be most significant and beneficial where the beneficiaries
have participated in the whole process of formulating the project.
 Farmers for example will be more willing to make contributions to projects that they have
participated in formulating.

Cost recovery
 Projects may also attempt to obtain funding from the recovery of costs incurred by the project or by
charging for service provided by the project. E.g. charging for water in an irrigation project, or for use
of tractor in a cultivation project.
 Cost recovery will depend upon the ability and willingness of users to pay.

1.2 Relationship between plans and projects

 Projects provide important means by which investment and other development expenditures foreseen
in plans can be clarified and realised.
 Naturally, sound development plans require good projects, just as good projects require sound plans.
 Sound planning depends on the availability of a wide range of information about the existing and
potential investment and their likely effects on growth and other national objectives.
 Project analysis provides this information, and projects selected for implementation become the
vehicle for using resources to create new income (agricultural income).
 Although sound planning requires good projects, effective project preparation and analysis must be
set in the framework of a broader development plan
 Projects are thus a part of an overall development strategy and a broader planning process.

1.3 Difference between a programme and a project

 The major difference between a project and a program is no so much in the objective stated, but lies
more in the scope, the details and accuracy.
  A project is design with a high degree of precision and details as regards its objectives, features,
calculation of returns and implementation plan.
 A programme by contrast is general, lacks details and precision, and aims at broader goal often
related to Sectoral policy of a country or departmental policy of an organisation.
 A programme can be defined as a system of projects or services intended to meet public need.

1.4 Project versus operations

 Operation can be defined as a process or series of acts especially of practical or mechanical nature
involved in particular form of work.
Project Operations
 Unique  Repetitive
 Finite  Eternal
 Revolutionary change  Evolutionary change
 Effectiveness  Efficiency
 Goals  Roles
 Risk and Uncertainty  Experience

1.5 Advantage and limitations of the project format

1.5.1 Advantages of the project format

a) Projects carefully prepared, within the framework of broader development plans, can advance and
assess the larger development effort.
b) The project format can also establish the framework for analysing information from a wide range of
sources.
c) Project format can facilitate participation in gathering information, defining assumptions and
evaluating how accurate it is.
d) Project format provides an idea of the costs on year-to-year basis and thus informing the
prospective financiers to do proper planning.
e) Project forma tells something about the effects of the proposed investment on the participants in
the agribusiness project (farmers, small firms, government enterprises, or society).
f) At an individual level, the project format proposed project has and judge if the individuals and
others may successfully be induced to participate.
g) It is also possible to forecast and judge the administrative and organizational problems likely to be
encountered.
h) Project format encourages conscious and systematic examination of the effects of alternative. One
alternative could be the effects of no project at all
i) It also helps to contain the data problems. (Once the project area or clientele has been determined,
local information on which to base analysis can be efficiently gathered and judgments can be made
about social and cultural institutions that might influence the choice of the project design and its
pace or implementation. Investment can then proceed with confidence)
1.5.2 Limitation of the project format

a) Projects will exist in a changing technical, social as well cultural environment. For example the
possibility of technological obsolescence will affect judgments about the attractiveness of the
investment.
b) Due to the changes in future circumstance, one must judge the risk and uncertainty surrounding a
project. The available methodologies and techniques in project analysis although useful, offer only
limited help.
c) Project analysis should be interpreted with great caution, partly because the quality of analysis will
depend partly on data used (garbage in garbage out).
d) Unrealistic assumptions on yields, prices, inflation, response of farmers, market shares, processing
technology, competition can make garbage out of the project analysis.
e) The assumption that the project is small in relation to the whole economy (to have an impact on
say prices) may not always be true. Some projects have been relatively large in relation to a national
or regional economy.
f) Project format is suited to comparing close project alternatives and which costs and benefits can be
relatively well be valued (e.g. two irrigation projects).
 In this case cost-effectiveness analysis is used.
 Project format is more useful when applied to unique investment activities.
 Project format works best where there is a large rather clear investment-return cycle and a
rather clear definition of geographical area or clientele.
g) Project format faces a conceptual problem of valuation based on the price system.
h) After all projects are not the only development initiatives that government undertake. The
development process calls for such measures as good policies and political will among other
things.
i) Projects are planned and implemented in a political environment having many objectives some of
which may be in conflict. Looking simply on projects may be shortsighted.
 CHAPTER 2
AGRIBUSINESS PROJECT CYCLE
1.6 Definitions

 Planners view a project as a living thing, a continuous process made of sequences and steps. This
process is usually called the project cycle.
 There are many ways-all equally valid in which this cycle may be divided.
 In this class we will divide it into; identification, preparation and analysis, implementation and
monitoring, and evaluation.
 This sequence is adopted from an article by Baum (1978) hence sometimes referred to as the Baum‟s
Cycle.

1.6.1 Features of the Baum cycle

Identification

Preparation
Monitoring &
Evaluation

Implementation
Appraisal
and Monitoring

1.6.2 Advantages and disadvantages of the Baum cycle

 The major advantages of the Baum‟s cycle are: -

o It provide uniform format for project preparation in a logical framework and sequence within which
data collection, compilation, analysis and investment priorities were established;
o It provide the basis for common communication between the borrower and the bank; and
o It is objective oriented. Performance is based on achievements and emphasis is on planning a whole
project by technical personnel.

 The major disadvantages and criticisms of the Baum‟s cycle as summarised by Picciotto and Weaving
(1994) are: -
o Participation of beneficiaries and other stakeholders is minimal;
o Knowledge of physical and social-economic environment is often inadequate;
 o Projects are generally too rigid to respond to new economic and social-cultural environment except
for those assumed in the original blue print;
o Capacity building, though a critical factor to many projects, is not integrated in the project design. It
is usually assumed that this will be carried out by other projects. This makes project to rely more on
external technical support;
o External expertise and assistance has little or no knowledge of the local environment under which the
project will operate; and
o Too long a time elapse before a project receives approval for implementation.

1.7 Project identification

 Identification represents the earliest stage of the project cycle in which potential projects are
identified.
 There are four key phases of project identification: -

a) Actual project identification: -

 The generation of project ideas by formal and informal institutions and individuals.
 Project may be identified in many way including:
 Information from well-informed technical specialists and local leaders.
 Proposals to extend existing programmes.
 Development banks may also be sources of new projects.
 Projects may be resource based, seeking opportunity to utilize profitably available resources.
 Projects may be demand based, taking advantage of existing product markets (produce for a
ready market).
 Others are need based, produce a commodity or service that is needed by a population segment.
 Usually there is no shortage of proposal for projects that have been identified, but a shortage of
projects prepared in sufficient details to permit implementation.

b) Description of project idea: -

 Here the project idea is translated into a preliminary description of the project.
 Terms of reference for the project reconnaissance team are established and analyses of existing
situation are made. These include a broad evaluation of the future „with‟ and „without‟ the project.
 The extent and limitation of the project are also proposed.
 Different approaches to the project are identified.

c) Screening: -
 An initial review of project ideas and concepts to see if they should advance to the next stage or
should be abandoned.

d) Prioritisation: -
 The ranking and selection of projects against a set of criteria to identify the best project to move to
the next stage.
 Criteria for ranking projects may include: -
 Extent: -
o Number of people affected by the project;
o Geographical area affected by the project;
 Economic and Financial: -
o Potential economic benefits to the country or region;
o Potential financial benefits to farmers and local communities;
  Environmental: -
o Conservation of natural resources and more sustainable land use;
o Protection to natural resources (e.g. forests)
 Social: -
o Poverty alleviation;
o Assistance to disadvantaged groups;
 Policy: -
o Is the project inline with the national policy?
 Resources: -
o Availability of human resource to implement the project;
o Likely availability of funding from Government, NGOs and/or donors;
 Success or Failure: -
o What are the chances of the project successfully meeting its objectives?
o What degrees of risks are associated with the project that may affect its implementation?
 Support: -
o Political support for the project;
o Community support and demand for the project;
 During selection, each project can be assessed against each of the criteria to give a rating.
 At this stage of the cycle this is likely to be a qualitative rather than quantitative.

1.8 Project preparation and project analysis (Feasibility)

 During this stage detailed planning begins.

The stage is also know as project
- Determination of technical, economic and financial feasibility;
- Establishment of project location, size and scope,
- Determination of resource base, etc.

 Project preparation stage consists of two parts: - the pre – feasibility study and the feasibility study.
 The feasibility study is the basis for a detailed project design. This stage is concerned with the study
of a unique project alternative for which the viability is analysed.
 A feasible project is the one, which satisfies at least four conditions: being technically, financially,
socio-economically and politically viable.
 A good feasibility study should:
(1) Reflect the objectives of the project in mind,
(2) Provide alternative ways to achieve the same objectives,
(3) Enable the planner to exclude poor alternatives.
 In a viable project, things should work as designed; that is, it should be possible to do them in
practice.
 Pre-feasibility and full-feasibility study reports are the outcomes of this process.

1.8.1 Aspects of project preparation and analysis

 In designing and analysing projects several aspects have to be considered concurrently to determine
how remunerative the project investment will be.
 There are about 8 important aspects to be considered:
a) Technical
b) Institutional
 c) Organisational
d) Managerial
e) Social
f) Commercial
g) Financial and
h) Economic aspects
 These aspects are related and must be considered and re-considered in the planning and
implementation cycle.

1.8.1.1 Technical aspects

 The technical analysis of a project concerns the project‟s inputs (supplies and outputs production of
goods and services.
 The major question asked here is whether the project will work as it has been proposed!
 Issues addressed may include:
 Soils in the region of the project and their potential for development;
 Availability of water natural (rainfall) and supplied (irrigation);
 The crop varieties and livestock species suitable to the area;
 Production supplies and their availability; etc.
 Potential and desirability of mechanization;
 Pest incidence and control measures needed in the project area.

 On the basis of these and similar considerations, the technical analysis will determine the potential
yields in the project area, the coefficients of production, potential cropping patterns, and possibilities
of multiple cropping etc.
 Technical analysis may also examine the marketing and storage facilities required for successful
operation of the project, and the processing stems that will be needed.
 The technical analysis may also identify gaps in information that must be filled before project
planning or in the early stages of implementation.
 The major task is to ensure that the technical work is thorough and realistic to make judgment about
the technical feasibility of the project.

1.8.1.2 Institutional, organizational and managerial aspects

 A number of issues in project preparation organizational, and managerial aspects of projects with
important effect on project implementation.
 These will determine whether the project will be successfully implemented or not.
 Some of the basic question asked include:
 Does the project design take into account the customs and culture of the individuals participating
in the project?
 Will the project disrupt the ways in which the project participants are accustomed to working?
 What are the land tenure arrangements existing in the area?
 Will changes in land tenure arrangements be necessary and possible?
 What size of holdings are common and should be encouraged in order to have good results?
 Does the project involve local institutions and use them to further the projects?

 Hints:
 Organization proposal should ensure that the project is manageable.
  There should be clear lines of authority, accommodating customs and organizational procedures
of the area.
 Introduce organizational changes that will outperform the existing forms.
 These will limit conflicts and opposition in the organizational arrangement of the project

 Judgment has to be made on whether the available staffs are able to manage the project at that
particular scale.
 In the event that skill are inadequate to manage the project
 Training arrangements should be made
 A less complex project organizational set up should be established.
 Expatriates may be hired when necessary in short term.

 New and complicated managerial skills required by the participating farmers may have implications
on he rate or project implementation
 Where necessary, extension agents can help farmers learn new skill (with appropriate incentives to
the extension agents!)
 Provisions should be made for these agents in the organizational design and administrative cost of
the project.

1.8.1.3 Social aspects

 Some of the important social aspects the should be considered include:
 Income distribution pattern of the clientele
 Effect on employment;
 Changes in the quality of life (e.g. improvement of the health service provision and domestic
rural water supply)

 Adverse social effects of the project have to be considered

 Displacement of labour on introducing mechanization in agricultural production
 Environmental effects (siltation)
 Increase incidence of diseases (e.g. schistosomiasis, malaria etc.)

1.8.1.4 Commercial aspects

 Commercial aspects of a project include the arrangements for marketing the output produced by the
project and supply of inputs needed by the project.
 A careful analysis of the proposed market for the project outputs is required to ensure that there will
be an effective demand, at remunerative prices.
 Issues addressed include
 Where and when will the products be sold?
 The adequacy of the market to absorb the project output:
 The effect of the project output on the price (including level and direction of price changes);
 Availability and suitability of facilities to handle the products.
 Consideration of the final market of the product (whether for domestic consumption or export);
 Provision for processing or a separate marking project may be required.
 An assessment of the quality of products to meet the market demand;
 Financing arrangements for output marketing;
 Judgement about the future government policy on the project output will have to be considered.
 Appropriate arrangements have to be made to ensure that the project acquire that the project
acquires the necessary supplies on time.
1.8.1.5 Financial aspects
 Encompass the financial effects of the proposed project on participants.
 Some of the issues to be addressed include:
 What will be the probable changes in farm income?
 What will be the timing of this change?
 How likely are price change or fluctuation that cold affect farm severely enough that participants
will refuse to run the risk of participating in the project?
 What will be the effect of subsidy arrangements on farm income (if need be as an incentive
measure)?
 What changes in government policies might affect the income earned by farmers?

 In case of investment funds required, one should address:

 What investment funds will the project need and when?
 What will be the operating expenses when the project is underway?
 What will bet he sources of funds?
 Will changes in government policies be necessary to finance the project?
 How will the replacement of capital equipment be financed?
 What about salary scale for the project personnel

 Salient points with respect t fiscal impact of the project include:

 Whether the increased output generates significant new tax revenues
 Whether new subsidies will be required to encourage farmers to participate
 How will the subsidies have to grow as project implementation proceeds?
 When considering the financial analysis in the latter part of the course using the discounted cash
flow, details on the set up and elements included in the cost and benefit streams will be included.
 The discounted cash flow analysis enables an estimated other return to the equity capital of each
of the project participants, private and public.
 It is then left to the decision makers to change that return by income taxes, special lending
terms, change subsidy policies, or any of the other tools open to the society.

1.8.1.6 Economic aspects

 Require a determination of likelihood that a proposed project will contribute significantly to the
development of the total economy and that its contribution will be great enough to justify using the
scarce resources it will need.
 The point of view taken in the economic analysis is that of a society as a whole.
 The financial and economic analyses are thus complementary-the financial analysis takes the
viewpoint of the individual participants and the economic analysis that of the society.

1.9 Project appraisal

 It is a critical review of the project proposal (carried out by an independent unit). This appraisal will
usually be done by the financing organization (donor, ministry of finance, bank, investors).
 Provides and opportunity to re-examine every aspect of the project plan and asses whether the
proposal is appropriate and sound before resources are committed.
 A project properly appraised is more likely to attract donors and support from the Government.
 A sound appraised project is often seen as some guarantee that resources will not be wasted if the
project is financed.
 This appraisal of the project proposal may include the following:
  Technical appraisal, that is will it work as it has been proposed?
 Financial appraisal will review of the financing process of the project (identify sources of funds
plans for repayments, expected returns from the project etc.)
 Commercial appraisal will examine the acquisition of inputs and the disposal of the product
(reliability of sources and outlets, incentives for project participants etc.)
 Economic appraisal reviews the project benefits from the point of view of the nation. It may ask
whether the project serve nation interests?
 Managerial appraisal may examine the adequacy of the managerial capacity to run the project
satisfactorily?
 Organization appraisal my inquire how realistic the organizational structure is, including,
flexibility of the organizational structure etc.
 Examine critical assumptions that determine the success of failure of the project.

 An appraisal report (an outcome at this stage), will determine whether to proceed with the project,
discard it, or send it back for more information.
 If the appraisal results are in favour of the project, investment may proceed.

1.10 Project implementation

 Implementation follows appraisal stage.

 Implementation is also one of the most important parts of the project cycle.
 A few points are worth noting during this stage of a project cycle:
 The better and more realistic a project plan is, the more likely is that the plan can be carried out
and the expected benefits realized
 Project implementation must be flexible to take care of the changing project circumstances
(responding sensibly to economic or political changes)
 The greater the uncertainty of the various aspects of the project, the greater the likelihood that
changes will have to be carried out.
 Even as project implementation is underway, project manager will need to reshape and re-plan
parts of the project or perhaps the entire project.
 Implementation is a process of refinement, of learning from experience.
 It is a cycle by itself within the larger project cycle.
 Some project analyst divide the implementation phase into three phases:
 Investment period – the major investment of the project are undertaken.
 Development period, - the project builds up (may take three to five years in agricultural
development projects).
 Full development is reached- it continues for the life of the project.
 Project life:
 Project life is usually keyed to the normal life of the major asset, although for practical reasons a
project life rarely exceeds twenty-five to thirty years.

1.11 Project evaluation

 Project evaluation is the final phase of project cycle.

 Evaluation is the process for determining systematically and objectively the relevance, efficiency,
effectives and impact of the activities in the light of their objectives.
 Evaluation in the context of rural development projects, which by definition have a poverty alleviation
orientation, is concerned with the assessment of effects (benefits or costs) on the participants of the
project.
  It is an organizational process for improving activities still in progress and for aiding management in
future planning, programming and decisions making.
 The elements of success and failure are examined systematically in order to learn how to plan better
of future.
 Who or which group has benefited (or has been adversely affected),
 By how much (compared to the situation before the activity),
 In what manner (directly or indirectly), and
 Why (establish causal relationship between activities and results).

1.11.1 Monitoring versus Evaluation

 Whereas monitoring is carried out during implementation, evaluation is carried out:

1.11.1.1 On going evaluation

 On going evaluation is carried out during implementation to assess relevance, efficiency and
effectiveness, and present and future outputs, effects and impact.
 Provides information on the needed adjustment of objectives, polices, implementation strategies, as
well as future plans of the project.

1.11.1.2 Terminal evaluation

 Terminal evaluation - usually undertaken from to 12 months after the project completion
 Carried out either as a substitute for ex-post evaluation of projects with short-term gestation periods
(e.g., rural credit or agricultural extension) or before initiating a follow-up phase of the project.

1.11.1.3 Ex-post evaluation

 Ex-post evaluation is carried out some years after completion of the project. Why?
 Usually undertaken at full development, i.e., some years after project completion when full project
benefits and impact are expected to have been realised.

1.12 Problems of agribusiness project analysis

 Research shows that project analysis proves to be wrong predictors of the actual outcome of projects
due to fault project design or implementation, or it may be that the project analyst has done a poor
job of incorporating a good project design in an analytical framework.
 The most common reasons agricultural projects run into problems of implementation have been
grouped into five major categories {according to the review of the World Bank funded projects as
reviewed by Olivares (1978)}:
 Inappropriate technology
 Inadequate support system and infrastructure
 Failure to appreciate social environment
 Administrative problems
 Policy environment

 Other also reasons associated with shortcoming in project preparation and analysis include:
 Underestimation of cost, e.g. being systematically optimistic about cost or making poor cost
estimates of some items. (Including omissions of the costs during project analysis).
 Optimistic projections, (e.g. areas under cultivation, milk yields, increase in herd sizes, adoption
rates etc.).
  Failure to consider the climatic variability and thus overestimating returns (e.g. in rainfed
agriculture)
 Failure to take into consideration of the project delays .
 Overestimating returns, partly due to failure to take into account of adverse effects of the
investment on the project.
 Errors in translating technical assumptions into projections. For example, in one case, the analyst
assumed that orange orchards would reach full production the same year they were planted.

2.8 PARTICIPATORY PROJECT PLANNING

2.8.1 Need for community participation
Even experienced consultants often forget participation analysis. A participation study shows what
incentives are provided to project participants (the target group) in order to ensure that they successfully
play their role in the project. This
aspect is of principal importance in Participation of Beneficiaries in Community Development
developing countries where Projects: a Methodology
communities are often requested to
supply labour, to change their
customs, or to contribute freely their Step 1: Familiarization and Networking

labour force, or sometimes,
savings, in order to make a project a
success.
Participants in a project can include
project staff, suppliers, government
officials, politicians, workers‟
representatives and lenders.
All these institutions whose
collaboration in the project is required
' such as banks, consultants, firms,
their Once the project area is determined, people who have a mutual interest in the
project are identified and a network is established to enable relationships
between them. People involved include village leaders, local schoolteachers,
religious leaders, members of producers or trading associations, village elders,
influential men and women in local communities, and local experts. In this
step, the data required for a preliminary analysis of the project is gathered.
Step 2: Identification of Needs and Priorities Using local knowledge, an
inventory of community needs is made. Classification and priority in satisfying
these needs are established. At this stage, awareness of the problems and
alternative ways of solving them are raised through seminars and campaign.
Outside expertise is added at this stage.
Step 3: Agreement on Priority Needs and Problem-solving Methods Through
discussions and meetings, and guided by project experts, the project
beneficiaries organised in a network agree on priority needs and on their

contractors and even villagers should
be given a special treatment in project
appraisal.
But the most important of all project
participants, and often the most
forgotten by project experts, are the
participation in implementation of the project to be designed. This agreement
includes methods of monitoring and evaluation, and form of contribution, which
might be money, materials, labour, attendance of meetings and involvement in
monitoring.
Step 4: Detailed Design of the Project. The project experts design the detailed
project in which agreement of beneficiaries on project objectives, priority
needs, chosen methods of problem-solving and agreed participation made, are
included. The project organisation chart should indicate the position of the
project beneficiaries.

people sought to be involved in project

implementation, especially in rural
areas. These are often local
communities who are generally the
target. groups expected to benefit
from the designed project. This is
where the challenging issue of
community participation starts.
Step 5: Follow-up Meetings and On-going Evaluation During execution,
regular meetings are held between participants and project
management. The aim of these meetings is to monitor and
evaluate together project implementation, and also to carry out
education of beneficiaries on a continuous basis through
seminars and campaigns.

Recent experience of project implementation in the South has shown that successful projects are those which
have been accepted and supported by the local community; they are projects which have obtained moral,
physical and financial contributions from these communities. It is therefore an important assignment, for
whoever is designing or promoting a project, to imagine strategies to ensure effective community
participation to projects (See Box above).

Various methodologies are used in project formulation. Some are essentially participatory while
others are top-down approaches. Participatory tools are based on involvement of the project
stakeholders - the people or institutions participating directly or indirectly in the pro ject. In a
community-managed water supply programme, for instance, the stakeholders include:
 The managers of a rural water supply programme
 The board of directors of the rural water supply company The water users
 The water user group committees The village government
 The council of elders of the community The member of parliament
 The district council
 The ward executive council
 The water supply development programme
 The district water engineers

2.8.2 SWOT ANALYSIS

SWOT Analysis (also known as TOWS analysis) is a powerful technique for understanding your (community)
Strengths and Weaknesses, and for looking at the Opportunities and Threats you face. Used in a business
context, it helps you carve a sustainable niche in your market. Used in a personal context, it helps you
develop your career in a way that takes best advantage of your talents, abilities and opportunities. Business
SWOT Analysis What makes SWOT particularly powerful is that, with a little thought, it can help you uncover
opportunities that you (community) are well placed to take advantage of. And by understanding the
weaknesses of your business, you can manage and eliminate threats that would otherwise catch you unawares

More than this, by looking at yourself and your competitors using the SWOT framework, you can start to craft
a strategy that helps you distinguish yourself from your competitors, so that you can compete successfully in
your market.

Strengths:
 What advantages does your company have?
 What do you do better than anyone else?
 What unique or lowest-cost resources do you have access to?
 What do people in your market see as your strengths?

Consider this from an internal perspective, and from the point of view of your customers and people in your
market. And be realistic: It's far too easy to fall prey to "not invented here syndrome". Also, if you are having
any difficulty with this, try writing down a list of your characteristics. Some of these will hopefully be
strengths!

In looking at your strengths, think about them in relation to your competitors - for example, if all your
competitors provide high quality products, then a high quality production process is not a strength in the
market, it is a necessity.

Weaknesses:
 What could you improve?
 What should you avoid?
 What are people in your market likely to see as weaknesses?

Again, consider this from an internal and external basis: Do other people seem to perceive weaknesses that
you do not see? Are your competitors doing any better than you? It is best to be realistic now, and face any
unpleasant truths as soon as possible.

Opportunities:
 Where are the good opportunities facing you?
 What are the interesting trends you are aware of?
Useful opportunities can come from such things as:
 Changes in technology and markets on both a broad and narrow scale
 Changes in government policy related to your field
 Changes in social patterns, population profiles, lifestyle changes, etc.

Local Events
A useful approach to looking at opportunities is to look at your strengths and ask yourself whether these
open up any opportunities. Alternatively, look at your weaknesses and ask yourself whether you could open
up opportunities by eliminating them

Threats:
 What obstacles do you face?
 What is your competition doing?
 Are the required specifications for your job, products or services changing?
 Is changing technology threatening your position?
 Do you have bad debt or cash-flow problems?
 Could any of your weaknesses seriously threaten your business?

Carrying out this analysis will often be illuminating - both in terms of pointing out what needs to be done,
and in putting problems into perspective.

In this example, participatory project formulation should take into account the views of all the
parties listed above. When project formulation uses the classical top -down approach, only skilled
expatriates, bureaucrats and technocrats are involved in the project design.

A SWOT Matrix
Opportunities Threats

Strengths Using strengths to use opportunities Using strengths to avoid threats

Removing weaknesses to use Removing weaknesses to avoid

Weaknesses
opportunities threats

Experience in project management has shown that the probability to achieve project sustainability is
high when participatory approaches are used in project formulation. By contrast, there is a high risk
of project unsustainability, or failure, when the top-down project planning approach is used. Sound
projects can be formulated by mixing modern participatory tools and classical. top -down
approaches. In other terms, the views of stakeholders can be added to the classical project planning
recipes to generate a well-structured project.
This section shows how to use SWOT analysis and how to develop the project-planning matrix. SWOT
analysis is concerned with the identification of specific views, feelings and information that is directly
collected from project stakeholders. Issues to be identified include the strength or achievements, the
weaknesses or constraints, the opportunities for improvement and the threats which are considered as
external negative forces which increase the risks of failure. SWOT is therefore the abbreviation formed by
the fist letters of the words:

Strengths (S), Weaknesses (W), Opportunities (O) and Threats (T).

SWOT is a tool to help a community to identify the advantages and disadvantages of a project undertaking
by analysing the internal forces (strengths and weaknesses) and the external forces (opportunities and
threats) that affect the development process (See Table). .

2.8.3 The SWOT methodology

The SWOT methodology is characterized by the following features:

 Identification of project stakeholders

 Definition of the basic question
 Organisation of meetings
 Organisation of workshops

2.8.3.1 Identifying Project Stakeholders

The first step of SWOT analysis consists of identifying and grouping the stakeholders. By definition, a project
stakeholder is any person or institution involved directly or indirectly in the project. A stakeholder may be
inside or outside the community. He may provide an input or receive a benefit from the project. He may be at
the local, regional, national or international level. This contribution to the project may be technical, financial,
administrative and advisory. This role is never neutral, but is participative although the project may be
negative or positive. Examples of stakeholders include: suppliers of inputs and services, beneficiaries, users
of project outputs, project -personnel, management, administrative and political organisation, and
politicians.

It is obvious that the project stakeholders do not form a homogenous group and may have conflicting
opinions, various interests and different ideas and information.

It is therefore advisable to group stakeholders in homogenous categories, such as women and men,
managers, and personnel when carrying out SWOT exercises and meetings. The objective of making such a
separation is to obtain, at an early stage, a consensus in a group, and to improve transparency.

2.8.3.2 Defining the Basic Question

Defining the "basic question" is the main purpose of the SWOT exercise.
For instance, if a NGO carries out a SWOT analysis to evaluate its performance, the basic question may be
formulated as follows:
What has been the NGO's achievement and constraints during the last five years, and what direction
should the NGO follow to achieve sustainability?

Example of SWOT purposes may be expressed as follows:

 How can an institution achieve sustainability?

 How can our institution compete effectively in the open market?
 How can we introduce democracy and good governance in the administrative structure?
 How can famine be eradicated from our community?
 How can we protect the environment of a country with a high demographic growth and
accelerated use of non-renewable natural resources?

Explaining clearly the basic question to the stakeholders is crucial, and some time must be spent on this
explanation, especially if the stakeholders have a low educational background.

2.8.3.3 Organization of SWOT Meetings

SWOT meetings are generally organized following a timetable prepared in advance. Each group is asked
to contribute and express, in a lucid way, his views on achievements, constraint s, opportunities and
threats. An outside facilitator and one moderator should conduct the meeting. The facilitator's role is to
encourage the stakeholders to freely give their views and to make the most accurate record of
information given in the meeting.

It is noted that no change of information should be allowed to be made by the facilitator without
agreement with the stakeholders. An experienced facilitator may need about two hours to conduct a
SWOT meeting, using simple materials like newsprints, markers, tapes and coloured cards. A blackboard
might be used if available. Questions asked by the facilitator are similar to the following:

 What have been your achievements so far?

 What constraints have you faced in the past and at present?
 What external factor can help you to improve the present situation?
 What external factors are threats to further improvement?

The results of the group meeting is a list of strengths, weaknesses, opportunities and threats (See Table
below).
SWOT Analysis for a Rural Water Supply Project
INTERNAL EXTERNAL
Strengths Weaknesses Opportunities Threats
 Commitment  High intake
of managers  Illiteracy of members capacity
 Dependency on donor
 Transparency  Innumeracy  High demand
support
 Leadership  Lack of financial skills for water
 Insufficient water during
skills  Not gender sensitive  Availability of
dry season
 High water  Insufficient training
 Lack of clarity on
quality engineering skills institutions
ownership of the com-
 Sufficient water  Insufficient  Increase of
pany
 Willingness to  thrust to management the number of
pay for water water users

2.8.3.4 Organization of SWOT Workshops

The purpose of a SWOT workshop is double fold. First, the SWOT workshop aims at aggregating and
validating the information collected from the SWOT meeting. The second objective is to prioritize the
strengths, weaknesses, opportunities and threats. Participants in the SWOT workshop are selected
representatives of all groups present at the SWOT meetings. Gender balance should be obtained when
selecting the participants in the workshop from specific groups of stakeholders.

It is advised to prioritize the results of the SWOT in groups obtained by dividing the participants in the
SWOT workshop into four. The first group will deal with the strengths while the other three groups will
prioritize weaknesses, opportunities and threats, respectively. Each group will present its priorities in a
plenary session where all workshop participants will have a chance to discuss the priorities established in
separate groups. The results of the workshop is a list of 35 strengths, 3-5 weaknesses 3-5 opportunities
and 3-5 threats.

2.8.4 The Project Planning Matrix

The Project Planning Matrix or Logframe is presented as a table of four columns and four lines (see Table
below). The first line is used for the following headings:
 Hierarchy of objectives
 Objectively verifiable indicators
 Means of verification
 Important assumptions

Hierarchy of Objectives (Column I)

This is a heading of objectives which are presented in Column I. The project objectives are structured as
indicated below:

The Programme or Sector Goal is the first level of objective. It is also called "wider objective". The
programme or sector goal is often concerned with an abstract and imprecise objective which, however,
makes the best link with the development objectives of the community. An example of a programme goal
is "to increase the standard of living of the rural farmer." Another example is "improved health for the rural
population of a district" (See Table 2.4).
The Project Purpose is often termed "project objective or immediate objective. This objective in more
precise and more tangible than the project goal. An example of project purpose is "to increase paddy
production by 10% per year". Another example is "to meet the needs of domestic water supply for the
population of a district (See Table 2.4).

The Project Outputs indicate the results of project activities. For instance, “the annual target of 5,000
tons of paddy" shows a project output. In case of the water project, "new shallow wells, treated water,
etc." (Table 2.4).

The Project Inputs include the targets for raw materials, agricultural inputs, funds and personnel
required to carry out project activities.

Objectively Verifiable Indicators (Column II)

In column two, the matrix shows the indicators for measures of goal achievement; the conditions for
achieved purposes; as well as indicators for accomplished outputs and inputs.

There is therefore a need to establish the measurement for goal achievement. This is done by developing
an indicator which can be measured. For instance, if the goal is "to improve women standard of the
number of women involved in productive activities" can be an objectively verifiable indicator of goal
achievement.

The project purpose is verified by the conditions that indicate that the project objective has been
achieved. In an education programme, for instance, the purpose can be "to improve distribution of
books" to primary schools. This can be measured by the number of books and ed ucation materials
distributed.

Project outputs are easy to measure since quantifiable indicators, which measures the goods produced in
a project, can be designed, however, for services the exercise of designing indicators can be puzzling.
Inputs and activities can be quantified. In a project, the budget is a good source of information from
which quantifiable indicators can be formulated.

Means of Verification (Column III)

The means of verification answer the following question: "Where will information be obtained to
demonstrate what has been accomplished?" In other terms, the means of verification define from what
source which data or evidence will be collected.

Important Assumptions (Column IV)

Important assumptions are external factors needed to sustain the goals, attain the project purpose or
accomplish project activities. Assumptions are generally outside the control of the project.

The findings of the SWOT analyses can be used to establish the structure of a new project, which, in turn,
can be presented in a Project Planning Matrix or Logframe (Table below). These are a planning tool,
which helps project designers and stakeholders to understand the causes and effects between objectives in
developing an overall project or programme. Major elements of a Project Planning Matrix are:
 Overall project goals
 Specific purpose of project
 Anticipated project outputs
 Planned activities

Log-frame or Project Planning Matrix

I II III IV
Objectively
Hierarchy of objectives verifiable Means of Verification Important Assumptions
Indicators
External factors out side
Sources of data
Programme or Sector Measures of goal the control of project
needed to verify goal
Goal achievement necessary to
indicators
sustain objectives
Conditions
Sources of data
indicating that External factors needed to
Project Purpose needed to verify
purpose has attain goal
purpose
been achieved
Measures to Sources of data
External factors needed to
Outputs verify needed to verify
attain purpose
accomplishments status of output

Planned activities

Determining major elements of the Project Planning Matrix helps planners and stakeholders to clarify the
critical components of the project, their assumptions and relationship. A particular advantage of using the
log frame in project formulation is the resulting improvement of implementation, monitoring and
evaluation. Most donors now use Log-frames in their project cycle.

2.8.5 Linking SWOT to Project Planning Matrix

To be able to design a relevant, sustainable project, the SWOT exercise has to be linked to the Project
Matrix.

2.8.5.1 Designing Strategic Orientation

The first step in linking SWOT and the Project Planning Matrix is to develop strategies. Strategies are
alternative courses of actions to remove or reduce weaknesses and to avert threats. In such strategies,
the opportunities are addressed, and the strengths are used. To make strategies, strengths and
weakness are matched with opportunities and threats.

The exercise of developing strategies from SWOT is called "strategic orientation". The main steps in
developing strategic orientation are as follows:
 Step one: Definition of the problem area.
  Step two: Identifying strengths and weaknesses by carrying out an internal analysis, and defining
the opportunities and threats by carrying out an external analysis.

 Step three: Setting priorities of strengths, weaknesses, opportunities and threats by selecting 3 -
5 factors in each category.

 Step four: Matching strengths and weaknesses with opportunities and threats.

This matching is done by asking the following questions:

 Which strength can be used to exploit an opportunity?

 Which strength can be used to reduce or avert a threat?
 Which weakness should be improved upon or removed in order to be able to address an opportunity?
 Which weakness should be improved upon or removed in order to be able to reduce or avert a threat?

The matching can be presented in a simple table called a "SWOT matrix" as shown in Table. A listing of
SWOT for the earlier discussed rural water supply programme is given in Table

2.8.5.2 Constructing the Project Planning Matrix

The principle of linking SWOT with the Project Planning Matrix is based on :

 The Basic Question being reformulated in such a way that it becomes the project purpose.

 The Overall Objective is reformulated by looking at where the project purpose will lead to
or to which the "project purpose" contributes to.

 An Output is defined for each strategy. The output is defined by asking the question
"What needs to be achieved?" Results or outputs are organized in logical sequence.

 Indicators for the project purpose and the project results are defined.

 Relevant Activities are designed and inputs for activities are enlisted.

 Identification of Assumptions is done on the basis of the opportunities and threats.

Factors that have to be dealt with before activities start are formulated as pre-
conditions.
Logframe Matrix for a Rural Water Supply Project
OBJECTIVELY VERIFIABLE
NARRATIVE SUMMARY MEANS OF VERIFICATION ASSUMPTIONS
INDICATORS

- Number of villagers affected

by water-borne diseases - Knowledge of importance of
Goal
- Number of villagers trained - Statistics from Health 'water in relation to health
Improved health for the rural
Department - Mobilization of community
population of Morogoro District
- Data obtained from survey by local authorities
- Focus group - Co-operation of project
- Interviews with informants management with local
authorities

- Supply of safe water from - Count of shallow wells

Purpose
To meet the needs of domestic
water supply for the population
of Morogoro District
Outputs
- New shallow wells
- Rehabilitated shallow wells
-Treated gravity water
- New gravity water supply
scheme
Activities
- Underground water survey
- Construction of shallow wells
- Rehabilitation of shallow
wells
- Training of village workers
and village facilitators
shallow wells
- Rehabilitated water supply
schemes
- Construction works
- Rehabilitation works
- Training of villagers
- Training of facilitators
- Number and cost of
rehabilitated wells
- Number and cost of surveyed
wells
- Number and cost of
rehabilitated and constructed
water supply schemes
- Number and cost of trained
people
- Results of analysis of water
- Count of water schemes
- Project progress reports
- Interview with villagers
- Interview with facilitators
- Participants' observation
- People progress reports
- Group discussions
- water supply scheme records
- Random samples surveys
- Availability of water supply
engineers
-Availability of trained field
staff
- Availability of water sources
- Availability of spare parts
- Availability of chemicals
for water treatment
- Availability of water
engineers
- Willingness of villagers to
be trained

2.8.6 Project sustainability analysis

Recently, the concept of project sustainability has become important in cir cles of economists and
planners. This concept is based on the belief that project implementation should result in benefits that
have a lasting effect. Ideally, a project should not exhaust available resources like raw materials, inputs
and skilled labour.

In this way, continuity in production of goods and services remains possible and project implementation
does not consume all resources still needed by future generations. There is now a worldwide concern
that the development we are seeking to bring about through project undertaking should meet the needs
of the present without jeopardizing the ability of future generations to meet their own needs. In
sustainability analysis, the planner should make sure, therefore, that the proposed project meets specific
conditions in respect of sustainability.

2.8.7 Criteria for Sustainable Projects

 Low cost: - A project should only need a low investment cost.
 Adaptation to local skills: - A project should use skills, which are easily obtainable locally, with or
without special training.
 Use of local raw materials: - A project should largely use local raw materials.
 Output to meet basic needs of local people: - The products or services of a sustainable project
should meet the needs of the local beneficiaries.
 Import-substitution and foreign exchange savings: - A project should substitute imports and save
foreign exchange.
 Creation of employment: A project should create new employment. Profit Generation A project
should be profit generating or, should generate a surplus to make it self-reliant.
 Environmental harmony: - A project should maintain environmental harmony.
 Continuity of production: - A project should have a maintenance system which can allow its
production process to continue even after financial and managerial support has ceased.
 Supportive institutions: A sustainable project should have plans to ensure the continuity of
supportive institutions.
Gender balance: - A project should pay attention to "women in development. Important checklist include:
Involvement of women in project preparation, Access of women to land, water, food, shelter, education and
health services, Access of women to income generating activities, Inequity in the distribution of resources to
women versus men Creation of women jobs, Increase of the ratio of women labour in the total labour Increase
of the ratio of women in the decision - making body Availability of activities specially designed for women
Increase of funds affected to women activities, Introduction of technologies which reduce women workload
Impact on political equality between men and women Influence of the project on the prevention of male abuse
of power and violence, Education and training opportunities provided by the project to women, Influence of
the project on the reduction of gender bias.
 CHAPTER 3

IDENTIFYING PROJECT COSTS AND BENEFITS

 Project viability depends on a number of factors in addition to economic ones, and the decision to go
on with a project or not will depend on multiple criteria.
 But when investment funds and resources are limited, project sponsors tend to try to ensure that
funds are used to enhance economic development by generating additional resources for the
economy.
 The selection of projects should be made on a number of different criteria, of which economic and
financial viability will be necessary but not always a sufficient condition.
 In this chapter and others to follow we will concentrate in economic and financial analysis of projects.

3.1 Definitions

 Cost is anything that reduces an objective.

 Major categories of costs encountered in projects are the costs of goods, services, labour and land.

Goods and services

 Identification of goods and services is not much of a problem
 However, the question to answer is, how much goods and services is required, what is their value and
at what time are they needed?

Labour
 There is no investment without labour.
 Valuation of skills can give headaches to the planners especially in economic analysis where a shadow
price is often found more appropriate than the market price of labour.

Land
 Valuation of land depends on many circumstances including land laws, that determine its ownership
and use.
 In agricultural projects, economic cost is based on opportunity cost; that is the net value of
production forgone by investing.
 Benefit is anything that contributes to an objective.
 Generally, benefits arise from increased outputs or reduced costs.
 In both cases valuation is problematic.
 Major categories of benefits: -
 Increased value or quantity of production
 Quality improvement
 Cost reduction and loss of production
 Secondary costs and benefits
 Intangible benefits

 In identifying the costs and benefits for the purpose of carrying financial and economic analysis, it is
important to distinguish the following aspects.
 With and without project situation
 Direct transfer payments.
3.2 With and without project comparison

 In project analysis, we need to identify and value the cost and benefits that will arise with the
proposed project and compare them with a situation as it could be without the project.
 A without the project is sometimes referred to a situation of doing nothing.
 The “with and without” situation arises due to the availability of a number of ways of carrying out the
aims of a project.
 It is rare for a project to be a unique solution-normally the form of the project chosen is the best
alternative ways available, which may differ from others.

3.3 Direct transfer payments

 Refers to Shifts in claims to goods and services occur form one entity in the society to another do not
imply changes in national income.
 There are four common kinds of direct transfer payments in agricultural project analysis known:
 Taxes
 Subsidies
 Loans
 Debt services (the payment of interest and repayment of principal amount).

Taxes:
 In financial analyses, taxes are clearly a cost to the payer, since it reduces the net benefit to an
individual. But this does not reduce nation income, rather it transfers income form the individual to
the government.
 Payment of tax does not reduce the national income from the stand point of the society as a whole,
thus in economic analysis one would not treat the payment of taxes s a cost in project accounts.

Subsidies:
 These are direct transfer payments that flow in the opposite direction from taxes. For economic
analysis of a project one must enter the full cost of the fertilizer.

Loan and debt service:

 From an individual standpoint, loan increases payment of interest and principal amount reduces
them.
 However, form the nation standpoint, loan does not reduce national income available but it merely
transfer the control over resources available from the lender to the borrower.
 When the borrower pays interest or repays the principal, the borrower transfers the claim to the real
resources back to the lender, but neither the loan nor the repayment represents, in itself, use of
resources.

3.4 Costs of agricultural projects

 In almost all project analyses cost are easy to identify (and value) than benefits.
 Common cost items are related to:
 Physical goods; labour; land; contingency allowances;
 Taxes: debt services; and sunk costs.
3.4.1 Physical goods

 Most of the physical goods in agricultural projects can be easily identified and their values
established.
 They include tractors, livestock, fertilizers, seeds and pesticides and construction materials.

3.4.2 Labour

 Labour component of agricultural projects can be identified with easiness if one-address issues of
how much when and what type of labour will be required.
 However, labour valuation may pose problems that may call the use of shadow prices.
 Sometimes it is also difficult to value the family labour.

3.4.3 Land

 Identification of land to be used for agricultural project (where and how much may not pose serious
problems if expertise is available.
 Problems may arise in valuing land due to the kinds of land market existing when land is transferred
from one owner to another.

3.4.4 Contingency allowances

 Where significant investments estimates are made the assumption is usually that there will be no
modifications in design that would necessitate changes in physical work; no adverse phenomena such
as floods; or unusually bad weather.
 Generally such estimates also assume that there will no relative changes in domestic or international
prices as well as inflation during the investment period.
 However, this seems not to be the case.
 Provisions for possible changes in physical conditions or prices that would add to the baseline costs
are necessary.
 Such provisions are referred to as contingency allowances and are such a regular pat of the project
cost estimates.
 Contingency allowance may be divided into physical contingencies and price contingencies.
 Price contingencies are further subdivided into relative and inflation price changes.
 Physical and relative price contingency allowances are usually included in project costs.
 Inflation contingency allowances are not included among the costs in project accounts other than the
financing plan.

3.4.5 Taxes

 Taxes and tariffs are treated as costs in financial analysis but as transfer payments in economic
analysis.
 Taxes deducted in financial accounts remains in the economic accounts as part of the incremental net
benefit.

3.4.6 Debt service

 The payment of interest and the principal amount are treated as an outflow in financial analysis
 The two are transfer payments in economic analysis and thus omitted in economic accounts.
  It is argued that interest charges are relevant only when project begins to operate and its revenue are
flowing.
 During construction (or pre-operational phase) interest accrued for the capital by the lending entity
is frequently added to the principal amount of the loan.
 Capitalizing interest is the process of adding the value of interest to the principal amount before the
project becomes operational
 The amount that is added to the principal as a result of capitalizing interest during construction is
similar to an additional loan.
 Capitalizing interest defers interest cost, but when the payments are actually due, they will be larger
because the amount of loan has been increased.
 In economic analysis, interest during construction is a transfer payment and should be omitted in
economic accounts.
 To obtain the economic value of the capital cost, the amount of interest during construction must be
subtracted from the capital cost and omitted from the economic account.

3.4.7 Sunk costs

 Costs incurred in the past upon which a proposed new investment will be based
 In investment analysis, only future returns to future costs are regarded,; expenditures in the past, or
sunk costs, are not taken into account.
 Sunk costs essentially imply that the firm that invested earlier was unable to recover these costs.

3.5 Tangible benefits of agricultural projects

 Benefits from agricultural projects emanate from either

 increased value of goods and services produce
or
 reduce cost in producing of goods and services.
 If such benefits can be appraise at an actual or approximate price or economic values referred to as
tangible benefits.
 In agricultural projects, tangible benefits may come from:
 Increased production, quality improvement, changes in time location of sale, and change in
product form (due to grading and processing)
 Cost reduction, loss reduction, time savings, reduction in accidents and
 Increased accessibility to markets.
 However, sometimes the specific from in which tangible benefits appear is not always obvious and
valuation may be difficult.

3.6 Secondary costs and benefits

 Projects may lead to benefits created or costs incurred outside the project itself.
 Usually related to technological spillover or technological externalities.
 Such costs or benefits pose problems while carrying out economic analysis but not financial analysis.
 Economic analysis must take account of these external, or secondary costs and benefits so that they
can be properly attributed to the project investment.

3.7 Intangible costs and benefits

 Costs or benefits that, although having value, cannot realistically be assessed in actual or
approximate money terms.
  Intangible costs include: diseases, illiteracy. Environmental degradation, inconvenience.
 Intangible benefits include improvement in: health, education, and employment generation.

3.8 Valuation of Intangible Benefits

 Intangible benefits are sometimes valued as being at lest equal to the estimated cost of the best
alternative method of providing the same benefit usually referred to as alternative cost valuation.
 The tangible cost of avoiding an intangible cost may be included in the cost of the project.
 However, the nature of intangible benefits and cost is such that real value of the of the cost of those
bearing it or of benefit to project participants cannot be determined.
 Projects, which a substantial amount of the benefit is intangible, may be evaluated using cost-
effectiveness analysis.
 Efforts should be made to identify and quantify intangible cost or benefits to the extent possible.
 CHAPTER 4
FINANCIAL ASPECTS OF PROJECT ANALYSIS

4.1 Pricing Project Costs And Benefits

 Costs and benefits must be valued if they are to be compared.

 The practical way of comparing different goods and services directly is to give each a money value
using prices.
 This assumes that price reflect the values of goods and services, or
 All least the existing prices can be adjusted to reflect the values of goods and services provide.

4.2 Price Reflects Value

 The assumption that prices reflect value implies that markets are perfect and that they are in
equilibrium.
 However, markets are not perfect and are never in complete equilibrium. Hence, prices may reflect
values only imperfectly.
 However, there is great deal of truth in the price theory based on the model of a perfect market.
 The best approximation of the „true value” of a fairly widely bought good or service is its market
price. In turn the buyer will use the item to increase output by at least as much as its price to gain
satisfaction of consuming the item.
 Hence, the market price of an item is normally the best estimate of its marginal value product
and its opportunity cost and thus used in valuing either a cost or a benefit.
 In financial analysis, the market price is always used. In economic analysis, shadow price may be a
better indicator of the value of a good or service.

4.3 Finding Market Price

 To obtain market prices, the analyst can go to the market and inquire about actual prices in recent
transactions
 Other source of market prices would include:
 Farmers, traders, importers, extension officers, government market specialists as well as
published statistic for both national and international markets.
 Two issues require special attention when finding market price namely:
 Point of fist sale in relation to farm gate price
 Pricing of intermediate goods.

4.3.1 Point Of First Sale And Farm Gate Price

 The point of first sale is the most appropriate point of determining the market price of agricultural
commodities, particularly if this is in a relatively competitive market
 The price at this point will be a best estimate of its financial and economic terms.
 Adjustments have to be made of reflect the economic terms of the goods and services in un-
competitive market.
 Price at the first point of sale will represent the farm gate price if no processing of the good is
undertaken.
 Value added due to processing is ideally not attributable to the investment in producing the
commodity.
  The farm-gate price for such commodities must be adjusted to reflect the cost of processing before
arriving at the farm-gate prices.
 Where price recorded include service (e.g. marketing services) not properly attributable to the
investment in the project, adjustments (to exclude these costs) have to be made so that the prices be
adjusted to reflect the farm-gate price.
 Although farm-gat price may be the best price to value home-consumed production, in some cases it
may be extremely difficult to determine a realistic farm-gate price for crops produced solely for
home consumption
 On the one hand, the true value of the crops can be overstated if the market price is used as the basis
for valuation because only a small proportion of the crop is sold
 Farm-gate price may be a poor indicator of the true opportunity cost of capital to be used in
economic analysis where distortions in form of taxes or subsidies are present
 Correction for the distortions has to be made before such prices can be useful in economic analysis

4.3.2 Pricing Of Intermediate Goods

 An intermediate good is an item produced primarily as an input in the production of another good.
 It is usually wise to look at the final output when doing valuation of intermediate goods and services
even if there are competitive markets for such goods.
 A good example is the fodder produce on a farm and then fed to the dairy animals on the farm. If
increased fodder is an element in the proposed agricultural project, one can at best avoid valuing the
fodder and instead value milk produced at its point of first sale or value the calves sold as feeder
cattle.
 In some countries it would hardly make sense in an egg production project to value pullets produced
in a pullet production enterprise and then “sell” these pullets to the egg production enterprise on the
same farm. But in other countries there might be an active market in pullets, which would mean that
we could expect to find a reasonably competitive price to use in the economic analysis.
 The other frequently encountered intermediate product in agricultural projects is irrigation water. It
has been fairly difficult to impute values in irrigation water
 This explains why economic analysis of irrigation project is evaluated using agricultural output
produced using the irrigation water.
 Whole farm budget instead of enterprise budgets are often use to avoid most of the problems of
imputing values for intermediate products.

4.3.3 Other Problems In Finding Market Prices

 Confusion may arise in determining the value of land and labour, which are important inputs in
agricultural projects especially when analysis moves form financial to economic analysis.
 When valuing labour in financial analysis, one usually enters the amounts actually paid to hired
labour, either in wages or in kind
 Family labour is not entered as a cost; but instead the “wages” for the family become a part of the net
benefit. If a project increases the net benefit, in effect it also increases the family‟s income or wages
for its labour. Thus family labour is treated differently from hired labour. Value of labour from other
sources has to be imputed.
 Problems are also encountered in the valuations of agricultural commodities due to substantial
seasonal price fluctuations. In this case some decision has to be made that is what price should be
used for the analysis.
  Difference in commodity quality may also pose valuation problems. In general it can be assumed that
output in the future will be of the same quality as in the past.
 However, one of the objectives may include upgrading the quality of the product as well as to
increase output. In such as case a proper price to select is the average price expected for the quality
to be produced.
 A special problem may also arise in pricing housing. If project investment includes housing
construction, then the benefit arising from the investment is the rental value of the house that in
most cases would be the amount paid by the tenant

4.3.4 Project Boundary Price

 This explains a situation where price used to analyse agricultural projects extends outside the farm-
gate
 Occurs where an agricultural project has a marketing component. Of concern are both the farm-
gate price (on which to base estimates of the net benefit to the farmer) and the price at which
processed product is sold in the market (after being handled by facilities of the project).
 Coffee improvement project that incorporates small-scale production as well as improvement of the
coffee curing plant and supporting of the coffee marketing board is a good example of such a
situation.
 The analyst may be interested in the price of coffee paid to farmers by the co-operative in estimating
incomes. When such a price is determined administratively, it cannot be used directly in economic
analysis of the project.
 The analyst will also be interested in the price of cured coffee (first product the project) sold in a
reasonably competitive market. In this case, the point of first sale is f.o.b. (free on board) at the port,
and the price becomes the basis for the benefit stream.

4.4 Predicting Future Price

 Although determination of market prices is important, equally important is the judgment about the
future prices that the project will face (we concern ourselves about the future)
 One possibility in predicating future prices is to assume that future prices will have the same
relationship as it is in the current period (Unrealistic as prices will change due inflation and
relative rice changes)

4.4.1 Change In Relative Prices

 A change in relative price of an item implies a change in its marginal productivity or a change in the
satisfaction it contributes when it is consumed.
 In economic analysis, a change in relative price of input implies a change in the amount that must be
forgone by using the item in the project instead of elsewhere in the economy.
 Also implies a change in the contribution the output of the project makes to the national income
 Some of the important questions to be asked include:
 Will inputs become more expensive overtime in relation to other commodities?
 Will some prices fall relatively as supplies increase?

4.4.2 Inflation

 Inflation exist almost in every country, thus no project analyst can escape deciding on how to deal
with inflation in project analysis.
 In project analysis, the approach most often taken to deal with inflation is work with constant prices
  It is assumed that inflation will affect most prices to the same extent so that, prices retain their same
general relations.
 When this is used the analyst need only adjust future price estimates for anticipated relative changes,
but not for any changes in the general price level.

4.5 Prices For Internationally Traded Commodities

 Where significant quantities of inputs and outputs associated with the project are traded
internationally, trading prices are used.
 In most cases, adjustment will be required to achieve prices at a given reference point for most of
traded goods.
 Two types of prices for internationally traded goods and services are known in project analysis
account:
 Free on board (f.o.b) for exported good. Starting from the farm-gate or project boundary price,
some adjustments will be required to arrive at the export point price (f.o.b)
 From farm gat price, the following could be adjusted to arrive at f.o.b price, marketing and
transport costs; local port charge including taxes, storage, loading, fumigation, agents‟ fee
etc.; export taxes and subsidies

 Cost insurance and freight (c.i.f) for imported goods. Similarly import price has to be adjusted
accordingly to obtain c.i.f price.
 To arrive at the cot insurance and freight value for an import requires the following
adjustments to be considered: f.o.b cost at the export point, freight charges to the import
point, insurance charges and charges related to unloading from the vessel bringing the
imported goods at the import point.

4.6 Financing of projects

4.6.1 The Amount of Credit to Use
Unless a farmer's net worth is sizable, many farm assets are likely to be financed with credit. Credit refers
to the ability to control the capital of another in return for a promise to repay it by a specific future date.
The use of credit is constrained by the business's borrowing capacity. The borrowing capacity, determined
by the lender, is the maximum amount of credit the business can obtain. However, the amount of credit to
use, that is, money to borrow, within this constraint is a decision made by the farm manager.

The difference between the borrowing capacity and the amount borrowed is the credit reserve, a backup
source of liquidity available for unforeseen events and investment opportunities. The credit reserve is the
manager's unused borrowing capacity. For example, if a farm business has a borrowing capacity of
$2>0,000 but borrows only 5?00,000, a credit reserve, or financial cushion, of S50,000 is left. The larger
the reserve, the more able the farm manager is to assume risk. However, there is an opportunity cost
associated with this credit reserve; this cost is the income forgone by not investing this capital in the
business.

Any increase in borrowing, of course, reduces the credit reserve. However, by increasing the business's
debt-carrying capacity, it is possible to increase the credit used from borrowing without necessarily
reducing credit reserves. To increase the farm business's borrowing capacity, the manager must be familiar
with alternative sources of agricultural credit, understand loan terms and their implications, and approach
the lender with a well-prepared presentation. These topics are discussed later in this chapter.
4.6.2. Classification of Agricultural Loans
Productive loans that a farmer requires, may be classified into short-, medium and long-term loans
based on the length of the repayment period.

Short-term Loans: These loans are generally advanced for the purchase of seed, chemicals and hiring
labour and machinery during a crop season. Short-term loans are, therefore, also called seasonal loans.
The normal duration of such loans is generally up to 15 months.

Medium-term Loans These loans are advanced for financing the purchase of such capital items, the
returns from which keep on accruing over more than one production period. Examples of such capital
items are livestock, machinery and other farm equipments. These loans are generally expected to be repaid
between 15 months and 5 years.

Long-term Loans: Some assets like land, heavy machinery and buildings often need relatively large loans.
It is normally very difficult for farmers To repay these huge loans in periods less than 5 years, particularly
from the additional income generated by the asset. Such loans are normally expected to be repaid between
5 and 15 years and sometimes up to 20 years. In some countries, however, the repayment per iod may
extend even beyond 20 years. For example, the long-term loans are contracted for a maximum period of
30, 33.5, 57, 63 and 75 years in Finland, New Zealand, Switzerland, Hungary and France respectively.

4.6.3 Sources of Farm Credit

There are many sources of farm credit available to an average farmer in most countries of the world. The
best source of credit, however, depends on the amount and type of credit required and the preferences
of the individual farmer to some extent. Some of the major sources of farm credit are the following:

1. Non-Institutional Sources
 Relatives and friends
 Landlords
 Agricultural money lenders

 Professional money lenders

 Traders and commission agents

 Others

2. Institutional Sources
 Government
 Cooperatives
 Commercial banks

4.6.3 Basic Principles of Farm Finance

Financing the farm business involves a process of decision-making. That is, how much to borrow; from
which source to borrow, when to borrow etc., are a few important questions which every decision -maker
has to answer before he decides to finance his farm business. As with the other decision making
processes, here too economic principles are used to arrive at judicious decisions from time to time.
There are three basic considerations which must be borne in mind befor e a farmer decides to borrow or
before a lending institution decides to lend i.e.
(i) returns from the investment
 (ii) repaying capacity; and
(iii) risk bearing ability.

These are popularly known as the three R's of credit. If the additional returns from the u se of the
borrowed funds cover the principal and additional costs of borrowing. and the borrower has sufficient
capacity to repay the principal plus interest whenever it falls due and the borrower has enough ability to
bear the risk and uncertainty arising from probable financial losses, there is a sound case for lending or
borrowing. If the borrower fails to meet even a single criterion, the loan should not be advanced as there
exists no economic basis to justify it. Sometimes the concept of the three C's of credit is also used
instead of the three R's, but basically both have the same requirements of credit analysis. The three C's
of credit are character, capacity and capital position of the borrower. Loan should not be advanced until
all the C's are favorable to a borrower. We will discuss here only the repaying capacity in detail.

Repayment Capacity
The repayment capacity is calculated separately for self-liquidating and non-liquidating loans. It is,
however, essential to distinguish between self liquidating and non-liquidating loans first. Self liquidating
loans are used for short-term purposes, i.e. purchase of goods and services which depreciate in a year
or one production period: Contrary to this, the non-liquidating loans are used to acquire goods and
services which are not directly consumed but are generally used over a period of time, thus they do not
completely become a part of the costs of the first year.

The repaying capacities for each type of loan can be arrived at as follows:
(i) Repaying capacity' for self-liquidating loans

= (Gross income) - (living expenses + working expenses excluding proposed loan + taxes +
other loans and repayments due)

(ii) Repaying capacity for non-liquidating loans

= (gross income) - (living expenses + working expenses including seasonal loans + taxes
+other repayments due)

Example: Suppose an amount of US$. 1,400 is to be used by a farmer as a self-liquidating loan. His
repayment capacity with and without a loan may be analysed as below:

Withoutcred
With Credit of US$ 1,400
it
Gross returns (US$.) 3,500 5,020
Working expenses (US$.) 1,000 1,000
Returns overcash expenses 2,500 4,020
Living
(Rs.) expenses (US$.) 2,000 2,000
Other loans and repayments due (Rs.) 400 400
Repaying capacity (US$) 100 1,620

It may thus be carefully noted from the above analysis that the repayment capacity has increased to US$.
1,620 with credit from US$. 100 only without credit. Almost always, the repayment capacity increases
with the credit.
 4.6.4 Methods of Repayment
There are several plans available to the borrower to repay the amount borrowed. The best plan, however,
is the one which corresponds to the time and amount of repaying capacity. If the borrower has a
repayment capacity of US$. 1,000 and income accrues every six months, the repayment plan must
include a provision of payment of US$..1,000 every six months. Any other repayment plan, like lumpsum
repayment of US$..2,000 per year, would obviously be inferior. Some of the commonly used repayment
methods for the long-term and medium-term loans are described in the following paragraphs.

Straight-end Repayment or Lump sum Repayment

The entire loan is paid on the expiry of the term; however, the interest is paid each year. It has the advantage
in that the requirement not to pay immediately may lead to capital formation. Also, when deep fluctuations in
agricultural incomes occur from year to year due to risk and uncertainties, it may be a preferred method of
repayment since installment payment may not be possible during some years. All the same, this method has a
defect in that lumpsum payment may be more difficult and the interest cost higher.

Amortized Even Repayment

According to this method an equal amount is repaid each year. The amount paid includes two portions,
i.e. a larger proportion of principal and a smaller portion of interest, in each succeeding installment of
payment as shown in Fig. A This method is preferred when income generated
Amount of instalment (Rs)

Fig. A Amortized even repayment plan

through the assets purchased with borrowed funds, like tractor and pumping set, is likely to be the same
every year during the repayment period. The formula used for calculating the annual repayment of the
loan according to this methods is where P, B, n, and i are the amounts of annual install ment (principal +
interest); face value of loan, i.e. the principal; number of years for which the loan is taken and annual
interest rate respectively.
Loan Repayment: Amortized Even Repayment
Annual Amount of Amount of Unpaid balance
Amount of
Installment annual Principal at the end of
Interest (US$)
number installment (US$) period (US$.)
1 (US$)
263.80 100.00 163.80 836.20
2 263.80 83.62 130.18 656.02
3 263.80 65.62 198.20 457.82
4 263.80 45.78 218.02 239.80
5 263.80 .23.98 239.82‟ -
Total 1,319.00 318.98 1,000.02‟
'Rounding up errors of -I- 0.02

Amortized Decreasing Repayment

According to this method the amount of principal remains constant every year but the amount of
interest keeps on declining with every instilment of the repayment (Fig. B).

Fig.B Amortized decreasing repayment plan

Thus, the amount of the installment repaid becomes smaller and smaller every year. This method is better
suited for loans for the purchase of machinery and equipment on the farm as these items require lower
amounts for repairs and maintenance during the initial years of their purchase there by sparing more for
repayment during these years.

The decreasing repayment plan for the example in earlier section is given in Table B.

Table B Amortized Decreasing Repayment

Unpaid
Annual Amount of Plan Amount Amount of principal
balance
instilment installment of interest US$.)
(US$.)
number (US$) (US$.)
1 300 100 200 800
2 280 80 200 600
3 260 60 200 400
4 240 40 200 200
5 220 20 200 -
Total 1,300 300 1000 .
Variable Repayment Plan

The defect with amortized repayment plans is that they are quite rigid and as such do net give any
allowance to income variability over time. Thus the borrower may turn a defaulter during the year of low
income. In order to get rid of this shortcoming the method of variable repayment is sometimes
suggested. Primarily, the agreements are made on the basis of some amortized repayment plan but the
loans are re-written every year taking into account the income variations from year to yea r. In years of
good incomes, higher amounts are repaid while during poor years small or no repayment in made.
 CHAPTER 5
MEASURES OF PROJECT WORTH
5.1 Comparing Project Cost and Benefits

 When costs and benefits have been identified, priced and valued, the analyst is ready to determine
which among various projects to accept, which to reject.
 The major problem facing the analyst is to find some way to evaluate projects that will last several
years and that have differently shaped future cost and benefits streams.
 The criticisms for different techniques use for measuring project worth are many. But let it be clear
that: -

 There is no one best technique for estimating project worth (although some are better than
others).
 These financial and economic measures of project worth are only tools for decision-making.
There are many non-quantitative and non-economic criteria for making project decisions.
 The usefulness of the analytical techniques is to improve the decision making process, not to
substitute for judgment.

5.2 Undiscounted Measures of Project Worth

 Measures of project worth are many. They can easily be categorised into two groups: non-discounted
and discounted measures of projects worth.
 The non-discounted measures of project worth (also referred to as static methods) use the cash flow
as obtained through the project period without taking the present value of future flows into
consideration i.e. time factor not included in the calculations.
 The discounted measures of the project worth (dynamic methods) use the present value of future
costs and returns i.e. time factor is included.
 The most used non-discounted measures of the project are:
 Rank by inspection
 Payback period
 Return on investment

5.2.1 Ranking by Inspection

 In some cases, we can tell by simply looking at the investment cost and the times when the stream
for the net value of incremental production occur that one project should be accepted over another if
we must choose.
 In general, there are two instances when using Inspection: -
 When with same investment, two projects produce the same net value of incremental production
for a period, but one continues to earn longer than the other (Box 1 we choose project 2 to 1).
 End of Year Project 1 Project 2

2001 0 0
2002 $500,000 $500,000
2003 $500,000 $500,000
Accumulate cash flow $1,000,000 $1,140,000
Rank 2 1

Both projects in the first two year have the same investment outlays, Project 2 earns more
interns of accumulated cash compared to project1 thus we rank project 2 as number one.

 In other instance, for the same investment, the total net value of incremental production may be
the same, but one of the projects has more of the flow earlier in the time sequence (Box 2 we will
choose project 4 to 3)
 Project 3 and project 4 have an identical initial investment outlay.
 In addition, they have the same life span period of two years, and the net proceeds
throughout the life period are identical.
 Although the total net proceeds are identical, the project 4 earns more income early than
project 3. Project 4 earns $100,000 in the second year.
 Project 4 is desirable as it earns $100,000 earlier than project 3.

Box 1 initial Investment $1,000,000

End of Year Project 3 Project4
2001 0 0
2002 $360,000 $360,000
2003 $500,000 $600,000
2004 $340,000 $240,000
Accumulated cash flow $1,200,000 $1,200,000
Rank 2 1

5.2.2 Payback Period

 The payback period for a project is the time from the initial cash outflow to invest in it until the time
when its cash inflows add up to the initial cash outflow. In other words, how long it takes to get your
money back. The payback period is also referred to as the payoff period or the capital recovery
period. If you invest $10,000 today and are promised $5,000 one year from today and $5,000 two
years from today, the payback period is two years -- it takes two years to get your $10,000
investment back.

Box 3 Estimate cash flows for Investments A and B

Investment A Investment B
End of Expected Accumulated cash Expected cash flow Accumulated cash flow
year flow
2000 $1,000,000 0 -$1,000,000 0
2001 $ 400,000 400,000 $1000,000 100,000
2002 $ 400,000 800,000 100,000 200,000
2003 $ 400,000 1,200,000 100,000 300,000
2004 $ 400,000 1,600,000 1,000,000 1,300,000
2005 $ 400,000 2,000,000 1,000,000 2,300,000
  By the end of 2002, the full $1,000,000 is not paid back, but by 2003; the accumulated cash flow hits
(and exceeds) $1,000,000. Therefore, the payback period for Investment A is three years.
 The payback period for Investment B is four years. It is not until the end of 2004 that the $1,000,000
original investment (and more) is paid back.

Payback Period Decision Rule

 Is Investment A or B more attractive? A shorter payback period is better than a longer payback period.
Yet there is no clear-cut rule for how short is better.
 Investment A provides a quicker payback than B. But that doesn't mean it provides the better value
for the firm. All we know is that A "pays for itself" quicker than B. We do not know in this particular
case whether quicker is better.

Limitations of using the Payback Period

 In addition to having no well-defined decision criteria, payback period analysis favors investments
with "front-loaded" cash flows: an investment looks better in terms of the payback period the sooner
its cash flows are received no matter what its later cash flows look like!
 Payback period analysis is a type of "break-even" measure. It tends to provide a measure of the
economic life of the investment in terms of its payback period. The more likely the life exceeds the
payback period, the more attractive the investment. The economic life beyond the payback period is
referred to as the post-payback duration.

5.2.3 Return on Investment

 Also referred to as average income on cost it should not be confused with the rate of internal return
(IRR), which is a discounted measure.
 Average income on cost is obtained by dividing the average income by the cost of investment as
shown in box 4.

Box 4: Average income on cost

Project Cost $ Average Income $ Average income on Ranking
Investment cost%
1 1,000,000 250,000 25 4
2 1,000,000 285,000 28.5 3
3 1,000,000 300,000 30 1
4 1,0900,0900

 The average income on cost has a disadvantage of not taking into consideration the timing of the
cash flow.

5.3 The Time Value --of Money

 A bird in hand is worth two in the bush

 Present values are better than the same values in the future, and earlier returns are better than later.
 Time is an important aspect in project analysis (why?)
 Has implications in the time horizon for the project in consideration, i.e the life span of the
project
 Important in weighing the costs and benefits that occur at different points in time
 Affects the value of money received or spent during project life
 Discounting techniques is dependent on time horizon (discount rate and time horizon are related
5.3.1 Interest

 Economists generally explain interest as arising for the following reasons: -

 If we lend money to someone else, we are deferring until the future the possibility of using that
money for our own present pleasures, if we do this we are entitled to a reward-and interest is that
reward.
 If a farmer lends money to his neighbour, on one hand the farmer is passing up the opportunity to
use that money for some productive purpose of his own. On the other hand, his neighbour is gaining
the use of the money to put to another productive purpose. It is reasonable that the lender be
compensated for the income he has forgone.

5.3.2 Discounting

 Discounting is essentially a technique by which one can reduce future benefit and cost streams to
their present worth
 In order to discount future values of cost and benefits to the present the following conditions must b
satisfied:
 Variables to be discounted have to in the same units, normally monetary units
 Non-monetary units such as numeraire are used in special cases
 Present costs and benefits are valued more (given more weights) than those occurring in the
future i.e. if we a choice of having sh. 100,000 today or sh. 100,000 next year, we would choose
to have the cash today
 This means that the sum paid at a future date is valued somewhat less than that paid today
 Discounting formula:
1
Pv = fv/(1 + r)n

 Second term on the Right Hand Side is known as the discount factor or present worth factor
 Discount factor explains how much a shilling at a future date is wroth today
 Discount factor is also a reciprocal of the compounding factor, all obtainable

Qn: How is the interest rate or discount factor determined?

 There are at lest three explanations for this:
 Opportunity cost of capital

 Also reflects the amount of return forgone or generated by the capital invested (rate of
return to the capital)
 Costs of borrowing money
 Based on associated costs of borrowing money including failure to repay the borrowed
amount and risks of completely defaulting payments and risks of completely defaulting
payments
 When this happens, the cost of borrowing is used to set the discount rate

 One of the dangers of using the cost of borrowing in setting discount rates is the extremely
favourable loans (at very low interest rates) favour projects with long term net benefits
whereas a high discount rate will favour short-term pay-off project resource misallocation.
 Social rate of time preference
  Relies on the ability of the society to better reflect the trade-off between the present and
future than individuals
 From the society‟s viewpoint, if individuals over consumer at present, the social rate of time
preference will result into a lower discount rate than that exhibited by individuals (life time
of an individuals is much shorter than society‟s )
 The reverse is true
 Setting of the discount rate greatly depends on the circumstances prevailing
 if the social, rate of time preference is determined by the political process, which is turn
influenced by elected official who may have a very short time horizon, namely until the next
election, then a high discount rate should be expected
 In any case the choice of the discount rate will be situation specific and will probably be established
as a matter of government policy
 Project analyst should seek guidance on which rate to use from relevant institutions

5.4 Discounted Measures Of Project Worth

 Three important measures of project worth incorporating the principles of discounting

 Net present worth (value) (NPV); and
 Internal Rate of Return (IRR)
 Benefit-Cost ratio (B/C)

5.4.1 Net Present Worth

 Definition: The net present value (NPV) of an investment is the present (discounted) value of future
cash inflows minus the present value of the investment and any associated future cash outflows.
 What it means: It's the net result of a multiyear investment expressed in today's dollars.
 Strengths: By considering the time value of money, it allows consideration of such things as cost of
capital, interest rates and investment opportunity costs. It's especially appropriate for long-term
projects.
 Weaknesses: Ranking investments by NPV don‟t compare absolute levels of investment. NPV looks at
cash flows, not at profits and losses the way accounting systems do. NPV is highly sensitive to the
discount percentage, and that can be tricky to determine
 Decision rule: Projects with a positive NPV are expected to increase the value of the firm. Thus, the
NPV decision rule specifies that all independent projects with a positive NPV should be accepted.
When choosing among mutually exclusive projects, the project with the largest (positive) NPV should
be selected.

 The NPV is calculated as the present value of the project's cash inflows minus the present value of the
project's cash outflows. This relationship is expressed by the following formula:

 Where
 CFt = the cash flow at time t and
 r = the cost of capital.
  The example in Box 5 illustrates the calculation of Net Present Value. Consider projects A and B,
which yield the following cash flows over their five-year lives. The cost of capital for the project is
10%.

Box 5
Year Project A Project B
Cash Flow Cash Flow
0 $ - 1000 $ - 1000
1 500 100
2 400 200
3 200 200
4 200 400
5 100 700

Net Present Value

Project A:

Project B:

 Thus, if Projects A and B are independent projects then both projects should be accepted. On the
other hand, if they are mutually exclusive projects then Project A should be chosen since it has the
larger NPV.

 NPV considers the time value of money. In this example (Box 6), we compare two $1 million projects
with a minimum desired rate of return of 10%. On the basis of simple cash flow, the ATM installation
looks better because it generates $250,000 more over the life of the investment. But when the time
value of money is considered, the server consolidation project looks slightly better, with an NPV
higher by $9,000, because the returns occur earlier in the project‟s life.
Box 6: Net present Value
ATM installation Server consolidation
Year Discount factor Cash flow Present value if Cash flow Present value of
( at 10%) cash flow cash flow
0 1.000 -$1 million -$1 million -$ million -$million
1 0.909 +$500,000 +$454,500 +$1million +%$909,000
2 0.826 +500,000 +$413,500 +$750,000 +619,500
3 0.751 +500,000 +$375,500 +$500,000 +$375,500
4 0.683 +$500,000 +$341,500
5 0.621 +$500,000 +$310,500
Total +$1.5 million +895,000 +$1.25 million +$904,000
5.4.2 Internal Rate Of Return

 Definition: The internal rate of return (IRR) is the discount rate that results in a net present value of
zero for a series of future cash flows.
 What it means: It's a cutoff rate of return; avoid an investment or project if its IRR is less than your
cost of capital or minimum desired rate of return.
 Strengths: It provides a simple hurdle rate for investment decision-making. It's the method favored
by many accountants and finance people, possibly the ones at your company.
 Weaknesses: It's not as easy to understand as some measures and not as easy to compute (even Excel
uses approximations). Computational anomalies can produce misleading results, particularly with
regard to reinvestments.
 The IRR decision rule: specifies that all independent projects with an IRR greater than the cost of
capital should be accepted. When choosing among mutually exclusive projects, the project with the
highest IRR should be selected (as long as the IRR is greater than the cost of capital).

where

 CFt = the cash flow at time t and

 The determination of the IRR for a project, generally, involves trial and error or a numerical
technique. Fortunately, financial calculators greatly simplify this process.

 The example in Box 7 illustrates the determination of IRR. Consider projects A and B, which yield the
following cash flows over their five-year lives. The cost of capital for both projects is 10%.

Box 7
Year Cash Flow Cash Flow
0 $-1000 $- 1000
1 500 100
2 400 200
3 200 200
4 200 400
5 100 700

Project A:

Project B:
  Thus, if Projects A and B are independent projects then both projects should be accepted since their
IRRs are greater than the cost of capital. On the other hand, if they are mutually exclusive projects
then Project A should be chosen since it has the higher IRR.
Box 8: Internal Rate of Return
Discount rate 10% Discount rate: 15% Discount rate: 20%
Year Cash flow Factor Amount Factor Amount Factor Amount
0 -$1 million 1.000 -$1million 1.000 -0$1 1.000 -$ million
million
1 +$300,000 0.909 $273,000 0.870 $261,000 0.833 $250,000
2 +$300,000 0.826 $248,000 0.756 $227,000 0.694 $208,000
3 +$300,000 0.751 $225,000 0 .658 $197,000 0.579 $174,000
4 +$300,000 0.683 $205,000 0.572 $172,000 0.482 $145,000
5 +$300,000 0.621 $186,000 0.497 $149,000 0.402 $121,000
Total +$500,000 NPV = $137,000 NPV =+ +6,000 NPV NPV =
$6,000 =$102,000 $102,000
IRR = slightly more than 15%

 Exact calculation of the IRR requires some computation. For that reason, an approximation is often
favoured
 The approximation procedure is based on the principle that an interpolation between a positive and a
negative net present value approximately comes close to the condition of a net present value of zero
 Steps in approximating the IRR
 Choose two different discount rates, one leading to a positive NPV, the other to a negative NPV
 Interpolation between these two NPVs using the formula


where:
rl lower discount rate
rh higher discount rate

5.4.2.1 COMPARISON OF NET PRESENT VALUE AND INTERNAL RATE OF RETURN

 Considerable discussion has taken place about which is the better of the two techniques. They both
have advantages and disadvantages.
 Net Present Value
Advantages:
 It takes account of time preference for money
 It takes account of scale of investment. IRR will normally be the same.

Disadvantages
 It takes no account of capital required. IRR can enable ranking as will be higher for low capital
investment and vice versa.
 It is not always easy for untrained people to understand.
 It requires a decision on the appropriate discount rate.
 Internal Rate of Return (for financier‟s point of View)
Advantages:
 It provides a measure of the rate of return on capital invested
 No decision is required as to the appropriate discount rate.
 It is thought to be more easily understood than NPV

Disadvantages:
 It takes no account of scale of investment.
 It takes not account of timing of cash flows
 It cannot be calculated when all cash flows are positive or when they are all negative. This is a
theoretical limitation.
 Negative cash flows at the end of the investment‟s life may cause problems of multiple yields or
overstate the true IRR.

 SUMMARY: For simple accept/reject decisions, both give the same message:
 If NPV > 0 accept
 If IRR > cost of capital, accept

 Since you need to calculate cash flows for NPV you might as well do IRR at the same time.

 PROBLEMS may occur when choosing between investments are mutually exclusive. NPV is superior
over IRR on ranking exclusive investments, or limited capital

5.4.3 Benefit Cost Ratio

 Definition: The BCR is the ratio of all the discounted (yearly) incremental benefits and costs of a
project

 Thus, it expresses the benefit generated by the project per unit of cost of the project expressed in
present values

 Calculation

 where
Bt incremental benefit in period t
Ct incremental cost in period t
i discount rate in %
n years of project duration

 Interpretation: The BCR expresses the benefit generated per unit of cost
 BCR > 1: present value of benefits exceeds the present value of costs
 BCR = 1: present value of benefits equals present value of costs
  BCR < 1 the present value of costs exceeds the present value of benefits
 Selection criterion: projects with a BCR of 1 or greater are economically acceptable when the costs
and benefit streams are discounted at the opportunity cost of capital
 The absolute value of the BCR varies depending on the discount rate chosen; the higher the discount
rate, the smaller the BCR

t Incremental Benefits Incremental costs

Benefits Discount Present Costs Discount Present
factor 5% worth factor 5% worth
1 0 0.952381 0 1100 0.952381 1047.619
2 400 0.907029 362.8118 150 0.907029 136.0544
3 400 0.863838 345.5350 150 0.863838 129.5756
4 400 0.822702 329.0810 150 0.822702 123.4054
5 400 0.783526 313.4105 150 0.783526 117.5289
6 400 0.746215 298.4862 150 0.746215 111.9323
7 400 0.710681 284.2725 150 0.710681 106.6022
Total 2400 5.786373 1933.6 2000 5.786373 1772.7
Benefit – cost ratio at 5% = 1933.6/1772.7 =1.091

5.4.4 Comparison of Discounted Measures of Project Worth

Item) Net present value (NPV Internal rate of return Benefit cost ratio (BCR)
(IRR)

Selection Accept all independent
criterion projects with NPV of zero or
greater when discounted at
opportunity cost of capital
Accept all independent
projects with IRR equal
to or greater than
opportunity cost of
capital
Accept all independent
projects with BCR of 1 or
greater when discounted
at opportunity cost of
capital

Ranking Gives ranking for order of May give incorrect May give incorrect
implementation, if investment ranking among ranking among
costs are equal independent projects independent projects

Mutually Accept alternative with largest
exclusive NPV when discounted at
alternatives opportunity cost of capital
(NPV is the preferred selection
criterion for mutually
exclusive alternatives)
Cannot be used Cannot be used directly
directly; must discount
differences between
incremental net benefit
flows of mutually
exclusive alternative
projects

Discount rate Must determine a suitable Determined internally; Must determine a suitable
discount rate, generally the must determine discount rate, generally
opportunity cost of capital opportunity cost of the opportunity cost of
capital to use as a cut- capital
off rate
 CHAPTER 6:
RISK AND UNCERTAINTY IN PROJECT APPRAISAL
6.1 Risk and Uncertainty

 In the discussion of the investment criteria, it was generally assumed that the costs and benefits of
an investment are known with certainty. This is not normally the case, as these costs and benefits lie
in the future.
 Project appraisal is future-oriented planning and therefore based on estimations of future costs,
benefits, demand, prices etc.
 So far we looked at deterministic decision models (complete information)
 The future being uncertain poses a lot of questions as to whether the information is likely to occur or
not. Whatever the expectation, it is necessary to ascertain the extent to which results are likely to
occur and draw a strategy regarding what should be done in such case such results do not come true.
In project planning and management, sensitivity analysis performs this function.
 The amount of uncertainty about our estimates is likely to vary from one investment to another and
this uncertainty is something to be taken into account in making decisions on which investment to
carry out.

6.2 Treatment Of Uncertainty

6.2.1 Some short-cuts in dealing uncertainty

6.2.1.1 Payback Period

 To avoid problems associated with future uncertainties, projects are selected on merits, depending
on the period within which the initial capital investment is recouped.
 At times the period of re-coupment is a subject of policy, so much so that it is a priori determined.
 In such circumstance, it is the project that recoups the initial investment costs within the period is
selected. The idea behind is that, the sooner the initial capital is recovered, the better for the
investors.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Project A -100 20 20 25 30 50 75

Project B -100 30 45 60 15 - -

Project C -100 60 45 30 15 5-

 Project A, recoups initial capital investment after 6 years including the year of investment

 Project B, recoups initial capital investment after 4 years

 Project C, recoups initial capital investment after 4 after 2 years, Tshs.

  Project C recoups initial capital investment after 2 years, Tshs. 6,000,000 in year 2 and Tshs.
4,500,000 in year 3

 Project C is selected as it recoups initial capital investment quicker.

6.2.1.2 Changing the Value of Project Steams

 Due to the need to refine the previous techniques, to avoid problems of uncertainty, project costs are
increased by certain percentage say 10%. Alternatively, the same percentage is used to decrease the
value of project benefits.
 The choice of percent increase or decrease usually depends on the rate of inflation or expected rate
of price increase. The aim is to find out whether in the even costs or benefits decrease by that
proportion, the project would still be worth implementing.

Box 11: Changing the value of project streams

Unadjusted project stream of benefit and Cost (Shs.00,000)
Project 0 1 2 3 4 5 6 7
PV Benefits 0 13 8.2 10 11 11 11 11
PV Costs 15 0.9 7.4 9 10.1 10.1 10.1 10.1
Net Benefits -15 12.1 0.8 1 0.9 0.9 0.9 0.9

NPV = TShs.252000

Increase in Cost by 10% ( Tshs.00,000)

Project 0 1 2 3 4 5 6 7
PV Costs 15 0.9 7.4 9 10.1 10.1 10.1 10.1
10% Increase 1.5 1.5 0.09 0.74 0.9 1.01 1.01
PV Costs (adj.) 16.5 0.99 8.14 9.9 11.11 11.11 11.11 11.11

Adjusted stream of Benefit and Cost ( Tshs.00,000)

Project 0 1 2 3 4 5 6 7
PV Benefit - 13.00 8.20 10.00 11.00 11.00 11.00 11.00
PV Costs 16.5 0.99 8.14 9.9 11.11 11.11 11.11 11.11
Net Benefits 16.5 12.01 0.06 0.1 -0.11 -0.11 -0.11 -0.11

NPV = TShs . 474 000

 The example above shows that the project was acceptable with NPV of TShs 252 000. However, the
increase of costs by only 10% reduced the NPV of the same project by TShs. 726000, i.e. from
TShs.252 000 to TShs. 474 000. this shows the unstable nature of the project net benefits to increase
in project costs.

6.2.1.3 Use of Risk Adjusted Discount Rate

 In some cases the uncertainty surrounding the project is tested using a certain percentage increase in
the discount rate. The discount rate initially used has to reflect the commercial or economic
conditions facing the project in question. This may be borrowing or the lending rate, depending on
 the opportunity cost. Given the rated uncertainty, discount rate is increased by a given percentage
say, 2%. The increase in the discount rate reduces the future value more than it was the case.

Box 12: Discount factors 10% for 7 years

Project 0 1 2 3 4 5 6 7
Discount factor 1.00 0.909 0.826 0.683 0.621 0.621 0.564 0.513
Factor? By 10% 1.000 8.893 0.797 0.712 0.636 0567 0.507 0.452

The table shows that the new discount factor penalizes the net benefits much more, and thus resulting to
much smaller values. This is more likely to reduce the attractiveness of the envisaged project. It is very much
possible for the result obtained to render the project unacceptable. If such changes leave the decision on the
project unchanged, then it is convincing that the project can be implemented without worries much on its
returns.

6.2.1.4 Use of Contingency

 In some cases a contingency element is introduced in project planning. Depending on the nature of
uncertainty, the investment, operating or total costs may be increased by some percentage. In the
final analysis, the changes will have increased the costs of undertaking the project.
 If a project passes the test, is accepted for implementation as being less sensitive to increased costs.
If it does not the project is rejected on the grounds that it is uncertain.

6.2.2 Safety Margins, Switching Values and Sensitivity Analysis

 Most of the techniques used in dealing with uncertainty assume that the uncertainty facing the
project is global, such that one is compelled to accept or reject a project, depending on the results
obtained.
 Such situations are rare and somehow unrealistic. In practice one is likely to be faced with a single
project and possibly with several alternative versions (the latter is a mutually exclusive project
situation). The former is then of a primary concern in this case.
 Logically it is useful to consider a project as comprising several components. It is equally logical,
when one considers the degree of uncertainty facing project component to differ form each other and
that facing the project as a whole.
 It is because of this reality that sensitivity analysis has to perform test to identify those sensitive
variables to which the results on which the decision on the project is dependent upon.
 It is not very likely that the several project components will be systematically tested to ascertain
project sensitivity. The variables chosen for analysis will very much depend on the knowledge about
the project‟s components and environment under which the project will be implementing.
 More often, but not mandatory, one need to carry out tests on major variables in the project.
Variations in such major items are likely to bring changes in values obtained in any of analysis stage.
Examples of such variables are investment costs, price or, major inputs, selling rice of output, and
variations on the cost of capital.
 The methodology used to carry out sensitivity analysis involves calculation of two values, namely
safety margins and switching values. These, though different, complement each other and led to the
same decision.
6.2.2.1 Safety Margins
 The safety margin of a variable, is percentage change in the variable that reduces the net present
value NPV) of a project to zero.
 This is a room of flexibility that a variable provides. The smaller the percentage the variable has to be
changed before the net present value (of a project turns to zero, the more sensitive the variable. The
reverse is true, if such a percentage is high.

Safety margin = (% change in variable / % change in NPV) * 100

6.2.2.2 Switching Values

 The switching value on the other hand addresses the same issue from a different perspective.

 Switching value seeks to establish the value of the variable, which turns the net present value of the
project to zero.
Switching value = Original value – (Original value x Safety margin)

 For the purpose of demonstration, only three components will be tested. These are:
 Investment costs;
 Operating costs; and
 Selling price of outputs.

Investment Costs
 Errors committed while estimating investment costs are often responsible for stalled projects. To be
certain on the behaviour of such variable, in the following example, we wish to investigate the effects
on the net present value of increasing investment costs by 15% at 12% rate of discount (Box 13).

Year Investment Cost 15% Increase Discount factor 12% Change in NPV
(12%)
0 39.6 5.94 1.00 5.94
1 0.893
2 0.797
3 0.712
4 0.636
5 1.0 0.15 0.567 0.085
6 0.507
7 0.452
8 0.404
9 0.361
10 0.33 0.048
11 0.287
12 0.257
13 0.229
14 0.205
15 0.183
16 -8.7 -1.31 0.163 -0.213
Total 5.861

The original NPV is T Shs.11,870,000.

Percentage change in NPV = (586,100 ÷ 11,870,000) x 100
Percentage change in NPV = 5%
Safety margin = (0.15 ÷ 0.05) = x100
Safety margin = 300%
By these results, it seems that the project is less sensitive to increase in investment costs. In order for the
NPV of the project to be reduced to zero, the investment costs have to increase by 300%. One explanation for
the insensitive results could be that investment costs are only a small proportion of the costs in this project.

Increase in operating costs

 In this case we wish to examine the effect on the NPV at a 12% discount rate, of the increase in
operating costs by 15%. The original NPV is TShs. 11 870 000.

Box 14 increase in operating cost by 15% and the effect on NPV ( TShs. 00,000)
Year Operating Cost 15% Increase Discount factor Change NPV (12%)
12%
0 0 0.000 1.000 0.000
1 325.3 48.795 0.893 43.567
2 388.9 64.68 0.797 46.504
3 431.2 64.68 0.712 46.038
4 431.2 64.68 0.636 41.105
5 431.2 64.68 0.576 36.701
6 431.2 64.68 0.507 32.769
7 431.2 64.68 0.452 29.258
8 431.2 64.68 0.404 26.123
9 431.2 64.68 0.361 23.324
10 431.2 64.68 0.322 20.825
11 431.2 64.68 0.287 18.594
12 431.2 64.68 0.257 16.602
13 431.2 64.68 0.229 14.823
14 431.2 64.68 0.205 13.235
15 431.2 64.68 0.183 11.817
16 431.2 64.68 0.163 10.551
Total 431.836

The 15% increase in operating costs decreases the NPV of the project at 12% rate of discount by 363.8%. To
decrease the NPV of the project tot zero, the operating costs would have to increase only by about 4.1%, i.e.
this margin is very sensitive to increase in operating cost. Without going to detailed computations, this kind
of the project requires at the management should strive to maintain the operating costs at the current levels
due to the fact that this variable is very critical.

 Any increase of the same is likely to jeopardize the acceptability of the project. If it turns out that the
management or project owners are not in a position of doing this, it may wise to reject the project
irrespective of the initially attractive NPV of TShs. 11,870,000.

Decrease in selling price of output

 In this case we wish to investigate the effect on NPV at 12% of a 15% decrease in output price. This is
likely to occur due to number of reason, including competition, availability of substitutes, etc.
Box 15: Effect of 15% decreased in output price on NPV ( Tshs.00)
Year Price/ 15% Output (t) Value DF 12% Change in
tonne Decrease decrease NPV
( 12%)
0 0 0.0 0.0 0.0 1.000 0.00
1 3700 555 7.5 4162.5 0.893 3716.52
2 3700 555 9.0 4995.0 0.797 3981.98
3 3700 555 10.0 5550.0 0.712 3950.38
4 3700 555 10.0 5550.0 0.636 3527.13
5 3700 555 10.0 5550.0 0.567 3149.22
6 3700 555 10.0 5550.0 0.507 2811.80
7 3700 555 10.0 5550.0 0.452 2510.54
8 3700 555 10.0 5550.0 0.404 2241.55
9 3700 555 10.0 5550.0 0.361 2001.39
10 3700 555 10.0 5550.0 0.322 1786.95
11 3700 555 10.0 5550.0 0.287 1595.49
12 3700 555 10.0 5550.0 0.257 1424.55
13 3700 555 10.0 5550.0 0.229 1271.92
14 3700 555 10.0 5550.0 0.205 1135.64
15 3700 555 10.0 5550.0 0.183 1013.96
16 3700 555 10.0 5550.0 0.163 905.33
Total 37024.34

The original NPV is TShs. 11,870,000.

Percentage change in NPV = (37,024.34 ÷ 11,870,000) x 100
Percentage change in NPV = 311.9%
Safety, margin = 4.81%
Switching value = original value – (Original value x safety margin)
Switching value = 3700 – (3700 x 0.0481)
Switching value = 3522

A 15% decrease in selling price of lint reduces the NPV of the project at 12% from TShs. 11,870,000 to
TShs. –37,024,340. To reduce NPV to zero, price need only fall by 4.81%, that is in order to break even,
the output (cotton lint in this case price will have to be 3522. this variable is equally sensitive and thus
serious attention should be paid.
 CHAPTER 7
PROJECT IMPLEMENTATION

7.1 Introduction
This is the implementation stage of the project where plan (appraisal) is put into action. Is one of the most
important part in project cycle. The better and more realistic the plan the easy the implementation. Flexibility
to allow changing circumstances should be allowed. Project implementation phase may need shaping and
reshaping part of the plan. The starting point of project implementation is the implementation schedule
 Help the manger to
 Develop the project work plan
 Monitor on-going project
 Alert on cost over runs or delay scheduling
 Tracking technical, time & cost performance
 Understand management implication for backstopping
 Timely procurement
 Financial control
 Administrative support

7.2 Scheduling Project Implementation

7.2.1 For a simple Projects
Simple projects involve only one or a few people over a short time. Typically, simple projects will have few
tasks dependent on other tasks, and will be relatively simple and easy to coordinate. Examples might be
coordinating delivery of resources for a workshop session, implementing a small marketing plan, or
delivering a simple software enhancement. Here appropriate timetables and Action Plans are often sufficient
to coordinate and implement simple projects. It will often be enough to create a work back schedule, starting
from the date by which the project must be completed, and listing all of the tasks in reverse order with due
dates for each.

Whatever the size of your project, ensure that you have agreed its scope with its sponsor (the person who
wants it done) before you start planning. This will help you to resist changes to its scope (known as "scope
creep"), which will seriously affect your plans, once you have started working.

7.2.1.1 Action Plans example for implementing a Small Scale Planning

Suppose you know that you need to produce a newsletter, organize a team-building session, put together a
bid for a new piece of work, or organize moving Jenny's team up to the second floor. Exactly what do you
need to do to achieve this? None of these are major projects. In fact, you can probably think of all the steps in
your head right now. But how do you ensure that you really have covered everything? Would anyone else know
where you'd got to with the work if you were unexpectedly off sick for a few days? And are you quite clear
about when you need to start if everything is to be done and dusted by the deadline?

An Action Plan is a simple list of all of the tasks that you need to carry out to achieve an objective. It differs
from a To Do List in that it focuses on the achievement of a single goal.
7.2.1.2 How to Use Tool:

Wherever you want to achieve something significant, draw up an Action Plan. This helps you think about what
you need to do to achieve that thing, so that you can get help where you need it and monitor your progress.
To draw up an Action Plan, simply list the tasks that you need to carry out to achieve your goal, in the order
that you need to complete them. This is very simple, but is still very useful!

Keep the Action Plan by you as you carry out the work and update it as you go along with any additional
activities that come up. If you think you'll be trying to achieve a similar goal again, revise your Action Plan
after the work is complete, by changing anything that could have gone better. Perhaps you could have
avoided a last-minute panic if you'd alerted a supplier in advance about when and approximately what size of
order you would be placing. Or maybe colleagues would have been able to follow up on the impact of your
newsletter on clients if you have communicated with them about when it would be hitting clients' desks.

Keep To-Do List. Do you feel overwhelmed by the amount of work you have to do? Do you face a constant
barrage of looming deadlines? And do you sometimes just forget to do something important, so that people
have to chase you to get work done?

All of these are symptoms of not keeping a proper "To-Do List". To-Do Lists are prioritized lists of all the
tasks that you need to carry out. They list everything that you have to do, with the most important tasks at
the top of the list, and the least important tasks at the bottom. And starting to keep a To-Do List effectively is
often the first personal productivity/time management breakthrough that people make as they start to make
a success of their careers.

By keeping a To-Do List, you make sure that you capture all of the tasks you have to complete in one place.
This is essential if you're not going to forget things. And by prioritizing work, you plan the order in which
you'll do things, so you can tell what needs your immediate attention, and what you can quietly forget about
until much, much later. This is essential if you're going to beat work overload. Without To-Do Lists, you'll
seem dizzy, unfocused and unreliable to the people around you. With To-Do Lists, you'll be much better
organized and much more reliable. This is very important!

Whilst To-Do Lists are very simple, they are also extremely powerful, both as a method of organizing yourself
and as a way of reducing stress. Often problems may seem overwhelming or you may have a seemingly huge
number of demands on your time. This may leave you feeling out of control, and overburdened with work.

7.2.1.3 Preparing a To-Do List

Start by writing down the tasks that face you, and if they are large, break them down into their component
elements. If these still seem large, break them down again. Do this until you have listed everything that you
have to do, and until tasks are will take no more than 1 - 2 hours to complete.

Once you have done this, run through these jobs allocating priorities from A (very important) to F
(unimportant). If too many tasks have a high priority, run through the list again and demote the less
important ones. Once you have done this, rewrite the list in priority order.
You will then have a precise plan that you can use to eliminate the problems you face. You will be able to
tackle these in order of importance. This allows you to separate important jobs from the many time-
consuming trivial ones.

7.2.1.4 Using Your To-Do Lists

Different people use To-Do Lists in different ways in different situations: if you are in a sales-type role, a
good way of motivating yourself is to keep your list relatively short and aim to complete it every day.

In an operational role, or if tasks are large or dependent on too many other people, then it may be better to
keep one list and 'chip away' at it.

It may be that you carry unimportant jobs from one To-Do List to the next. You may not be able to complete
some very low priority jobs for several months. Only worry about this if you need to - if you are running up
against a deadline for them, raise their priority. If you have not used

7.2.1.5 Key points to remember:

Prioritized To-Do Lists are fundamentally important to efficient work. If you use To-Do Lists, you will ensure
that:

 You remember to carry out all necessary tasks

 You tackle the most important jobs first, and do not waste time on trivial tasks.

 You do not get stressed by a large number of unimportant jobs.

Now carry out the jobs at the top of the list first. These are the most important, most beneficial tasks to
complete.

7.2.2 Complex projects

With simple projects, tools like Gantt Charts and Critical Path Diagrams (PERT) may overcomplicate project
scheduling and communication. Unless project team members are trained in their use, they can often 'blind
people with science', leading to poor communication and muddled projects.

7.2.2.1 Gantt Charts

Gantt Charts (sometimes misspelled "Gant Charts") are useful tools for analyzing and planning complex
projects. They:

 Help you to plan out the tasks that need to be completed

 Give you a basis for scheduling when these tasks will be carried out

 Allow you to plan the allocation of resources needed to complete the project, and

 Help you to work out the critical path for a project where you must complete it by a particular date.
Gantt Charts (sometimes misspelled "Gant Charts") are useful tools for analyzing and planning complex
projects. They:

 Help you to plan out the tasks that need to be completed

 Give you a basis for scheduling when these tasks will be carried out

 Allow you to plan the allocation of resources needed to complete the project, and

Help you to work out the critical path for a project where you must complete it by a particular date.

When a project is under way, Gantt Charts help you to monitor whether the project is on schedule. If it is not,
it allows you to pinpoint the remedial action necessary to put it back on schedule.

7.2.2.2 Sequential and parallel activities:

An essential concept behind project planning (and Critical Path Analysis) is that some activities are dependent
on other activities being completed first. As a shallow example, it is not a good idea to start building a bridge
before you have designed it! These dependent activities need to be completed in a sequence, with each stage
being more-or-less completed before the next activity can begin. We can call dependent activities 'sequential'
or 'linear'.

Other activities are not dependent on completion of any other tasks. These may be done at any time before or
after a particular stage is reached. These are nondependent or 'parallel' tasks.

7.2.2.3 How to use tool:

To draw up a Gantt diagram (Gant diagram), follow these steps:

(a) List all activities in the plan

For each task, show the earliest start date, estimated length of time it will take, and whether it is parallel
or sequential. If tasks are sequential, show which stages they depend on.

You will end up with a task list like the one in Table below. This example shows the task list for a
custom-written computer project. We will use this same example for both this section and the section on
Critical Path Analysis and PERT. This will allow you to compare the results of the two approaches.
Gantt Chart Example: Planning a custom-written computer project.

NB: The start week shows when resources become available. Whether a task is
parallel or sequential depends largely on context.
Task possible start Length Type
Dependent

on...

1. High level analysis week 1 5 days sequential

2. Selection of hardware platform week 1 1 day sequential 1

3. Installation and commissioning of hardware week 3 2 weeks parallel 2

week 1 2 weeks sequential 1

4. Detailed analysis of core modules

5. Detailed analysis of supporting utilities week 1 2 weeks sequential 4

6. Programming of core modules week 4 3 weeks sequential 4

7. Programming of supporting modules week 4 3 weeks sequential 5

8. Quality assurance of core modules week 5 1 week sequential 6

9. Quality assurance of supporting modules week 5 1 week sequential 7

10.Core module training week 7 1 day parallel 6

11.Development of accounting reporting week 6 1 week parallel 5

12.Development of management reporting week 6 1 week parallel 5

13.Development of management analysis week 6 2 weeks sequential 5

14.Detailed training week 7 1 week sequential 1-13

15.Documentation week 4 2 weeks parallel 13

(b). Head up graph paper with the days or weeks through to task completion

(c). Plot the tasks onto the graph paper

Next draw up a rough draft of the Gantt Chart. Plot each task on the graph paper, showing it starting on the
earliest possible date. Draw it as a bar, with the length of the bar being the length of the task. Above the task
bars, mark the time taken to complete them. Do not worry about task scheduling yet. All you are doing is
setting up the first draft of the analysis.

This will produce an untidy diagram like the one below:

(d). Schedule Activities

Now take the draft Gantt Chart, and use it to schedule actions. Schedule them in such a way that sequential
actions are carried out in the required sequence. Ensure that dependent activities do not start until the
activities they depend on have been completed.

Where possible, schedule parallel tasks so that they do not interfere with sequential actions on the critical
path. While scheduling, ensure that you make best use of the resources you have available, and do not over-
commit resource. Also allow some slack time in the schedule for holdups, overruns, quality rejections,
failures in delivery, etc.

(e). Presenting the Analysis

The final stage in this process is to prepare a final version of the Gantt Chart. This should combine the draft
analysis (see above) with your scheduling and analysis of resources. This chart will show when you anticipate
that jobs should start and finish.

A redrawn and scheduled version of the example project is shown below:

By drawing this example Gantt Chart, you can see that:

 If all goes well, the project can be completed in 10 weeks

 If you want to complete the task as rapidly as possible, you need:

o 1 analyst for the first 5 weeks

o 1 programmer for 6 weeks starting week 4

o 1 programmer for 3 weeks starting week 6

o Quality assurance resource for weeks 7 and 9

o Hardware to be installed by the end of week 7

 Analysis, development and installation of supporting modules are essential activities that must be
completed on time.

 Hardware installation is a low priority task as long as it is completed by the end of week 7

Not only do these ease the drawing of Gantt Charts, they also make modification of plans easier and provide
facilities for monitoring progress against plans, as well as generating resource histograms. Microsoft Project
is reviewed at the top of the left hand sidebar.
7.2.2.4 Key points to remember:

Gantt charts are useful tools for planning and scheduling projects. They allow you to assess how long a
project should take, determine the resources needed, and lay out the order in which tasks need to be carried
out. They are useful in managing the dependencies between tasks.

When a project is under way, Gantt charts are useful for monitoring its progress. You can immediately see
what should have been achieved at a point in time, and can therefore take remedial action to bring the project
back on course. This can be essential for the successful and profitable implementation of the project.

7.2.2.5 Critical path analysis

An essential concept behind project planning (and Critical Path Analysis) is that some activities are dependent
on other activities being completed first. As a shallow example, it is not a good idea to start building a bridge
before you have designed it!

Critical Path Analysis and Program Evaluation and Review Technique (PERT) are powerful tools that help you to
schedule and manage complex projects. They were developed in the 1950s to control large defence projects,
and have been used routinely since then.

As with Gantt Charts, Critical Path Analysis (CPA) helps you to plan all tasks that must be completed as part of
a project. They act as the basis both for preparation of a schedule, and of resource planning. During
management of a project, they allow you to monitor achievement of project goals. They help you to see where
remedial action needs to be taken to get a project back on course.

The benefit of using CPA over Gantt Charts is that Critical Path Analysis formally identifies tasks which must
be completed on time for the whole project to be completed on time, and also identifies which tasks can be
delayed for a while if resource needs to be reallocated to catch up on missed tasks. The disadvantage of CPA
is that the relation of tasks to time is not as immediately obvious as with Gantt Charts. This can make them
more difficult to understand for someone who is not familiar with the technique. A further benefit of Critical
Path Analysis is that it helps you to identify the minimum length of time needed to complete a project. Where
you need to run an accelerated project, it helps you to identify which project steps you should accelerate to
complete the project within the available time. This helps you to minimize cost while still achieving your
objective.

As with Gantt Charts, the essential concept behind Critical Path Analysis is that you cannot start some
activities until others are finished. These activities need to be completed in a sequence, with each stage being
more-or-less completed before the next stage can begin. These are 'sequential' activities. Other activities are
not dependent on completion of any other tasks. You can do these at any time before or after a particular
stage is reached These dependent activities need to be completed in a sequence, with each stage being
more-or-less completed before the next activity can begin. We can call dependent activities 'sequential' or
'linear'.
7.2.2.6 The importance of time in planning

Often time is a paramount factor' in selecting alternative ways of comple ting such projects. This is
especially true in construction, where the builder must generally complete work by the date on which
the user ' plans to take over the facilities. A new headquarters building for a corporation illustrates the
importance of timely completion. One procedure generally used to establish schedules for large
projects is the Program Evaluation and Review Technique,. Usually referred to by the acronym PERT.
This procedure may also be referred to as the Critical Path Method, or CPM. In addition to helping
establish scheduled, PERT can serve as a management tool for controlling the progress of any large
project when timely completion is important.

PERT has been credited with saving several months in completion time over what could have bee n
expected with more traditional procedures. Since then, PERT and other project management tools have
been adopted by the Defense Department for most large research and development efforts. PERT was
also adopted by the construction industry, and to a lesser extent it has been successfully used in other
types of industrial applications.

7.2.2.7 Drawing a Critical Path Analysis Chart

Use the following steps to draw a CPA Chart:

(a). List all activities in the plan For each activity, show the earliest start date, estimated length of time it will
take, and whether it is parallel or sequential. If tasks are sequential, show which stage they depend on.

For the project example used here, you will end up with the same task list as explained in the article on Gantt
Charts (we will use the same example as with Gantt Charts to compare the two techniques). The chart is
repeated in figure 1 below:

(b). Plot the activities as a circle and arrow diagram

Critical Path Analyses are presented using circle and arrow diagrams. In these, circles show events within the
project, such as the start and finish of tasks. Circles are normally numbered to allow you to identify them. An
arrow running between two event circles shows the activity needed to complete that task. A description of the
task is written underneath the arrow. The length of the task is shown above it. By convention, all arrows run
left to right. An example of a very simple diagram is shown below:
This shows the start event (circle 1), and the completion of the 'High Level Analysis' task (circle 2). The arrow
between them shows the activity of carrying out the High Level Analysis. This activity should take 1 week.
Where one activity cannot start until another has been completed, we start the arrow for the dependent
activity at the completion event circle of the previous activity. An example of this is shown below:

Here the activities of 'Selecting Hardware' and 'Core Module Analysis' cannot be started until 'High Level
Analysis' has been completed. This diagram also brings out a number of other important points:

Critical Path Analysis is an effective and powerful method of assessing:

 What tasks must be carried out

 Where parallel activity can be performed

 The shortest time in which you can complete a project

 Resources needed to execute a project

 The sequence of activities, scheduling and timings involved

 Task priorities

 The most efficient way of shortening time on urgent projects.

7.2.2.8 Networks: activity on arrow notation

A network consists of activities and events. Each activity can be illustrated by an arrow. Events denoting the
start and finish of each activity are illustrated by nodes (circles) and are usually numbered. Figure 10.1
shows one activity with nodes at the beginning and end.

This simple illustration of one activity could represent the following elements:
Activity A = transport goods from factory to warehouse.

Node 1 = start activity A, i.e. goods can be transported.

Node 2 = activity A finished, i.e. transport of goods completed.

Such elements are grouped together in order to represent the interrelationship between activities.

Single events, represented by nodes can indicate the start or finish of more than single activities. For
instance, the diagram shown in figure 10.2 shows node 1 indicating the start of three activities (A, B and
C), and node 6 represents the completion of two activities (f and G).

It should be noted that other network notations could be used. In particular, most project management
computer packages use the nodes, rather than arrows, to indicate activities. This notation will be explored
later in the chapter.

Project networks: example

The network shown in Figure 10.3 illustrates some simple steps involved in organizing a training course.
This network diagram illustrates the various activities required to complete the proje ct. An arrow on the
diagram represents each activity. Nodes (circles) are numbered and drawn to indicate the start and finish of
each activity.

The network diagram clearly illustrates the relationships between the activities. For example, according to
this diagram, applications for the course can only be processed after the course has been advertised.
Furthermore, the course can only be run after the applications have been processed and the course
documentation produced. Using the network diagram enables the illustration of complex relationships
between a range of activities.
Example
Consider the following table, which gives a list of activities involved in a factory expansion scheme.

Activity Preceding activity

A: Plan new site -
B: Move to temporary premises A
C: Build new plant A
D: Train staff B
E: Install machinery C
F: Move production to new site D, E

This table describes the precedence for each activity. For instance, activity A (plan new site) is preceded by
nothing. Activity C is preceded by A. This tells us that the new plant cannot be built (activity C) before the
new site has been planned (activity A). Activity F is preceded by both D and E. This implies that the
production will be moved to the new site (activity F) only after staff have been trained (D) and machinery
installed (E).

The network for this list of activities is drawn in Figure 10.4.

Note that on the network the activities (indicated by the arrows) are labelled, and the nodes, indicating the
start and finish of activities, are numbered. The numbering of nodes is almost arbitrary. The only rule to be
followed when deciding on node numbers is that for each activity the number of the start node should be
less than the number of the finish node. These numbers can be used to represent (or describe) activities,
and are essential when computerizing the networking process. For example, activity A is node 1 to node 2
(1 to 2). Similarly, activity B is 2 to 3, C is 2 to 4, and so on.

Network analysis incorporates a variety of techniques used to help plan and manage the scheduling of
interrelated activities. These techniques can be particularly useful in project management, where the use of
networks will help to monitor projects, allocate resources where appropriate and review costs. In practice,
network analysis techniques are often more useful for complex projects involving many hundreds of
activities. In these cases the application of computer-based network analysis packages is beneficial.
7.2.2.9 Dummy activities

Occasionally, the relationship between activities cannot easily be illustrated because o# their unusual
dependencies. In some examples, dummy activities can be incorporated to illustrate the correct precedence.
A dummy activity can be considered as an activity that requires no resources or time, and will be treated as
such in any calculations.

EXAMPLE 1
Consider the following list of activities:

Preceding activity
Activity
A -
B -
C B
D A
E A,C

One attempt at drawing a network of these activities could be that shown in Figure 10.7.

Note that in all networks, one node represents the start of the project, and one node the finish of the
project. The diagram in Figure 10.7 is almost correct. However, the network does not illustrate the fact that
E follows A and C, as given in the original table. In the illustration shown in Figure 10.7, the activity E only
follows C.

In order to illustrate that activity E also follows A, a dummy activity (indicated by ---->) is included as shown
in the network in Figure 10.8.

Figure 10.3 Organising a training course network.

Definition: A network is a diagrammatic illustration of the relationship between groups of activities.

7.2.2.10 D r a w i n g n e t w o r k s
In order to produce a network diagram the following information must be supplied:
(i) a list of activities required, and
(ii) the interdependence between activities, i.e. which activities precede other activities.

EXAMPLE
Consider a project consisting of six activities (A, B, C, D, E and F). The duration of each activity is given in
the following table.

Activity Preceding activity Duration (weeks)

A - 5
B - 4
C B 2
D B 6
E A,C 7
F D 1

The network for this group of activities is shown in Figure 10.13. Note that the duration of each activity is
indicated on the network. In addition, the nodes are numbered to ensure that for every activity, the start
event number is less than the finish event number.

In order to analyse the overall duration in this project it is necessary to consider the earliest and latest
times at each of the nodes in the network. In order to accommodate these times in the diagram, each node
in the network is split into three sections as indicated in Figure 10.14. Each node includes three values: the
event number, the earliest event time, and the latest event time. The event numbering has already been
discussed in earlier examples. The earliest and latest times at each event (i.e. at each node) are calculated
as shown in the following sections. The earliest event times are calculated as follows:

EXAMPLE 2
Consider the first case study introduced at the beginning of--~this chapter. This concerned the structural
engineering consultancy group, Gilford & Partners. The design and construction of a major freeway
complex around the northern suburbs of Sydney involved a large number of interrelated activities. For the
purposes of this example, this construction project has been split into a small number of primary activities.
These activities are shown on p. 436 together with their precedence

Primary activities Precedence

A: Initial survey & site investigations -

B: Design roadways A

C: Planning applications & permission B

 D: Site preparation B

E: Construction of link roads D

F: construction of main freeway C,E

G: Erection of signs, lighting, etc C,E

H: Completion & hand over G

The network for this group of activities is illustrated in Figure 10.5. Note that activity A starts off the
project, and that the completion of activities F and H defines the end of the project.

This process is 'referred to as the `backward pass' and the completed network is illustrated in Figure
10.16.

7.2.2.11. Earliest and latest event time

The total project duration is an important factor when managing projects involving many activities. The
overall duration can be calculated from the network providing the duration of each activity in the project is
known.

1) A zero is placed in the first event node in the project. This represents the time at the start of the
project.
2) Subsequent earliest event times are calculated by adding an activity's duration onto the preceding
earliest event time.
3) If two or more activities lead into an event, then the earliest time on each route is calculated and the
largest value is used. Remember that a node indicates the finish of all activities leading into it. The
 earliest time at a particular node is determined by the longest route and therefore the largest value is
used.

This process is called the `forward pass' through the network. The earliest event times are indicated in the
network shown in Figure 10.15. The earliest time in node 2 must be calculated before the value in node 3 can
be obtained. Following this, nodes 3 and 4 must be calculated before the earliest time in node S is found.
Node .i indicates the end of the project.

At this stage, we see that the project can be completed at the earliest in 13 weeks. Now, the latest event
times are calculated in each node as follows:
(i) In the last node in the project, the latest event time equals the earliest event time. This seems logical
since the latest finish time for the overall project should normally be the same as the earliest finish
time. In other words, we would not want the project to last longer than is necessary. This value should
be entered.

(ii) Preceding latest event times are calculated by subtracting an activity's duration from the subsequent
latest event time.

(iii) If two or more activities start from an event, then the latest time from each route is calculated, and the
lowest value is used.

7.2.2.12 Critical p a t h a n a l y s i s
Critical path analysis (CPA) involves identifying the route (or routes) through the network that specifically
defines the overall duration. This can be achieved by calculation of earliest and latest event times as shown
in the previous section. Activities Ion the critical path are referred to as critical activities. Such activities have
no flexibility if the project is to finish on time. For instance, in order to finish the overall project on
schedule, critical activities must start on time, and be completed in the time allowed.
Any variation in the start time, duration, or finish time of a critical activity will invariably affect the overall
project duration.

A critical activity can be identified in the network diagram as follows:

(i) the earliest and latest start times are equal and
(ii) the earliest and latest finish times are equal and
(iii) the difference between the start and finish times equals the activity's duration.

The diagrams shown in Figure 10.19 illustrate a range of circumstances in which an activity X may be critical
or non-critical.

Definition: Critical path analysis (CPA) involves the use of networks in determining the `critical' activities in
the project Critical activities have no flexibility, and must start and finish on time in order for the project to
be completed on time.

EXAMPLE 3
The diagram in Figure 10.20 illustrates one of the networks developed in the previous section. The critical
activities are indicated on the diagram using the following notation:

Critical activity
Non-critical activity

This network shows that the overall project duration is 13 weeks, and the critical path is A, C, & E

All other activities are not critical. For instance, activity A is not critical since it can start on day 0 and finish
on day 6, giving a total of six days to perform an activity that only requires five days.

Overall, activities A, D and F are not critical. This implies that if the duration of any of these activities were
reduced, this would not affect the total project duration. However, if the duration of any of the critical
activities (B, C or E) changed, then the overall project duration would be affected.
10.8 Critical path analysis examples

EXAMPLE 3

Activity Preceding Duration

activity (days)
A - 5
B AC 4
C - 3
D B,D 3
E 2

7.2.2.13 Crash Action

You may find that you need to complete a project earlier than your Critical Path Analysis says is possible. In
this case you need to take action to reduce the length of time spent on project stages.

7.2.2.14 PERT (Program Evaluation and Review Technique)

PERT is a variation on Critical Path Analysis that takes a slightly more skeptical view of time estimates made
for each project stage. To use it, estimate the shortest possible time each activity will take, the most likely
length of time, and the longest time that might be taken if the activity takes longer than expected.

Use the formula below to calculate the time to use for each project stage:
 Shortest time + 4 x likely time + longest time
-----------------------------------------------------------
6

This helps to bias time estimates away from the unrealistically short time-scales normally assumed.

Key points: Critical Path Analysis is an effective and powerful method of assessing:

 What tasks must be carried out

 Where parallel activity can be performed

 The shortest time in which you can complete a project

 Resources needed to execute a project

 The sequence of activities, scheduling and timings involved

 Task priorities

 The most efficient way of shortening time on urgent projects.

An effective Critical Path Analysis can make the difference between success and failure on complex projects.
It can be very useful for assessing the importance of problems faced during the implementation of the plan.
PERT is a variant of Critical Path Analysis that takes a more skeptical view of the time needed to complete
each project stage.

7.2.2.15 Floats: definitions

The float shows the amount of flexibility for a given activity assuming that the project must finish at the
earliest time possible. The total, free and independent floats indicate the amount of flexibility for a given
activity based on their effect on previous and subsequent activities. A `float' gives the amount of flexibility or
spare time associated with each activity in the network. Critical activities have no flexibility and therefore have
zero float. There are three different types of float that can be calculated:

Total float: The amount of time an activity can be delayed without affecting the overall project time.

This can be calculated for each activity in the network using the following formula:

 Total float = Latest finish time - Earliest start time - Duration

Free float: The amount of time an activity can be delayed without affecting the overall project time and
without affecting the start times of subsequent activities.
The free float can be calculated as follows:

 Free float = Earliest start time of next activity - Earliest start time - Duration

Note: The earliest start time of next activity is normally equal to the earliest finish time of the current
activity unless it is followed by a dummy activity.
Independent float: The amount of time an activity can be delayed without affecting the overall project time,
and without affecting the start times of subsequent activities or the finish times of preceding activities.
The independent float can be calculated as follows:
 Independent = Earliest start time of next activity – Latest start time – Duration

These floats can be utilised in the analysis of flexibility in specific activities and may be useful in the
reorganisation of activities in the project if and when required. Such information can be used to determine
which activities can be rescheduled in order to create minimum disruption to the remaining activities and
limit any increase in the overall project duration.
 CHAPTER 8
MONITORING, EVALUATION & IMPACT ASSESSMENT

8.1 Introduction
The process of monitoring, evaluation (M&E), and impact assessment is the primary means of collecting
and analyzing information, and is thus essential for good project managem ent. In order to be used in
a more positive manner, management and staff must have a common understanding of the importance
of the process involved, and the contribution it can make to achievement the objectives of the
technology development and transfer. To be effective, monitoring, evaluation and impact assessment
should be participatory, and should be on integral part of project planning and implementation.

Whilst monitoring and to a lesser extent ongoing evaluation, have been mentioned earlier. This Chapter
synthesizes the procedures be used throughout the whole process from problem identification to diffusion of
technology. The emphasis is in the process, not on individual project M&E.

8.2 Monitoring
Monitoring is a continuous assessment of other the functioning of the project activities in the
context of implementation schedules and of the use of project inputs by the targeted population in
the context of design expectations. The goals of monitoring are:
 To ensure that inputs, work schedules and outputs are proceeding according to plan i.e.
that project implementation is on course;
 To provide record of input use, activities and results: and
 To warn of deviations from initial goals and expected outcome

Thus, monitoring is a process which systematically and critically observes events connected to a
project in order to control the activities and adapt them to the conditions Key steps in the
monitoring process are:
a) Recording data on key indicators, largely available from existing sources, such as time sh eets,
budget report, supply records.
b) Analysis performed at each functional level management. This is important to assume the flow
of both resources and technical information through the system.
c) Reporting often through quarterly and annual progress repor ts, oral presentations, organized
by project staff.
Box 8.1 Objectives of M& E
d) Storage, whether
Checking implementation
manual or
 Record inputs activities and outputs;
computerized, should  Identify deviations from works plans; and
be accessible to  Identify constraints bottlenecks

mangers at different Assessing performance, quality and relevance

levels of the system.
Monitoring is an internal
project management tool.
Reflecting and learning
Integrating monitoring into
implementation increases
the accuracy of the collected
information reduces the
cost of acquisition,
 Overall efficiency (cost effectiveness):
 Overall effectiveness (achieving objectives);
 Suitability of new methods and technologies under testing at
the field sites; and
 Long-term impact (contribution to development objective).
 Leaning from achievements and mistakes;
 Increase capacity to perform better in the future; and
 Take connective action.
 Communication
 Share progress and results with others
increases the focus ("alertness-) of the participating scientists and reduces the time lag for management
corrections. Therefore, the emphasis is placed on simple methods. The various objectives of an M&E
system are summarized in Box 8.1.

In the context of research, monitoring includes the periodic recording, analysis, reporting, and storage of
data about key research and extension indicators. Data includes physical and financial information, details
of inputs and services provided to beneficiaries, and data obtained from surveys and other recording
mechanisms. Monitoring primarily provide information on project performance and gives signals on
whether an activity is proceeding according to plan. Monitoring is essential for evaluation.

It can also provide information on the socio-economic indicators for ex-post evaluation assessment. One
could simultaneously monitor the resource use, i.e., of funds and personnel, as well as the process.
Monitoring of the process may be accomplished through inter alia review meetings and periodic seminars.
This permits management to compare the progress of work against planned activities, detect deviations
identify bottlenecks, and take corrective action while research is in progress. Monitoring and Evaluation
are closely linked (see Figure 12.1) and are an integral part of project cycle

8.3 Evaluation

Evaluation is a much broader concept and is used to assess the following:

 The potential impact of research in priority setting and planning exercises;

 The performance and quality of activities in progress;

 The successful completion and relevance of activities; and

 The ultimate impact of results on the achievements of development objectives

Any assessment, appraisal, analysis or reviews are in a broad sense evaluative. Evaluation result in a set of
recommendations which may address issues of planning, such as a shift in program objectives or contents
or program implementation. Information from an evaluation is used in the management of technical
programs, personnel, and financial resources.
Figure 8.1 Relationship Between Monitoring and Evaluation

Evaluation

Information from Information from

Monitoring
Monitoring
Other sources

Recording Data

Analysis
Analysis

Reporting Information

Affirmation or
Corrective action at
the Operational Modification of
Storage
Level Objectives, Resources &
processes

Evaluation in general addresses four important aspects of the program, namely: performance, quality,
relevance and eventual impact.
 Performance compares achievements with expected output. It is primarily concerned with the use of
resources and the timelines of the activity and is determined mostly through monitoring and on-going
evaluation. However, assessing the success or failure of research goes far beyond determining where
resources were used according to plan or activities were carried out on time
 Quality deals with the adherence to accepted standards of scientific work and precision. The quality of
research is determined almost exclusively through some from of peer expert review.
 Relevance of research each level of the research investigates on research relevance to objectives. Which
ultimately reflect developmental objectives. Relevance is closely related to the problem being addressed
and the target group under consideration. Relevance is primarily assessed through peer or expert review
too.
 Impact deals with the effect of the research output on the ultimate sees often referred to as “People level
impact”

8.4. Types Of Evaluation

Evaluations are most often categorized according to when they occur in the project cycle and their purpose.
 Occurs before (ex-ante) the event - assess the potential impact of project.
 Occurs during (on-going) the event - to evaluate the performance and quality of the research project in
progress immediately after the event (ex-post) - to determine the successful completion and relevance of
research project.
 Several years after research results have been achieved (impact) - to assess its ultimate impact on
development.

8.4.1 Ex-ante Evaluations

Ex-ate evaluation is a research planning process, which includes a comprehensive analysis of the potential
impact of alternative activities before implementation. As the name implies the evaluation is done prior to
the initiation of the project, at this stage not too much is known about the proposed project and estimates
of costs and benefits are sketchy and the values assigned to them are only “ball-park” figures based on
informal judgment.

Some aspects of ex-ante evaluation are discussed i n Chapter 5. Methods used are peer or expert reviews
using checklists, scoring models, and even cost-benefit analysis. To make ex-ante evaluation more
effective, there should be participation from different disciplines and more comprehensive criteria must be
applied. Through ex-ante evaluation, one could define the baseline against which progress will be
measured, set targets, and state the assumptions used in making the projections. The indicators to be
monitored should also be specified in order to give assistance the ex-ante evaluation.

8.4.2 On-going Evaluation

On-going evaluations that are conducted throughout the technology development and transfer process are
more useful for research management than ex-ante and ex-post assessments. Here on-going activities
are reviewed at critical stages to determine if they should be continued, modified or aborted. They -are
used to analyze the use of resources, the quality of research, and the continuing relevance of research
programs and projects. On-going evaluation is often conducted through peer reviews. In the farming
systems approach context it is most likely to be applied during the implementation of interventions. Be
they research, extension or policy-related. The most prevalent form of on-going research evaluation looks
at research performance comparing achieved with planned activities. It indicates how efficiently resources
are being used. On-going evaluation addresses problems associated with the day-to-day management of
interventions and also can indicate the need for changes in project objectives and targets.

Monitoring is fundamental for on-going evaluation. It primarily tracks down the provision and delivery of
inputs and services, the generation of information on the ability and deployment of staff, infrastructure,
equipment, supplies, services, and funds for projects within a program. In on-farm research, the on-going
evaluation is used to obtain feedback from the target group; and is largely accomplished through a series of
meetings at the site with peers, farmers, extension staff and NGOs.

8.4.3. Ex-post Evaluation (immediately after the completion)

An ex-post evaluation, or final evaluation, assesses the project's performance. Quality and relevance
immediately after the project completion. It attempts to measure the effectiveness and efficiency of a
completed activity and includes an analysis of the original assumptions used in planning. A good ex-post
evaluation is linked to ex-ante evaluation, and can best be conducted' where a baseline has been originally
defined, targets have been projected, and data has been collected on important indicators.

Ex-post evaluation is analyzed for the project from beginning to end, determining whether project objectives
were attained, causes for discrepancies, costs, and the quality and relevance. of the research. Ex-post
evaluation often considers such aspects as the cost effectiveness of research, its potential relevance to
national development goals, the response of the research to an urgent and important problem, the
acceptance of development agencies, and the results by farmers (end-users) contribution of the research to
scientific progress.
Common criteria for evaluating scientific research are most notably number and quality journal publications
and instances of citation (citation index). These are not comprehensive enough to consider the
appropriateness of the technology or its value to development. Therefore, the classical criteria need to be
broadened to include user (i.e,. farmers‟) satisfaction.

The methods typically used for ex-post evaluation are statistical evaluation, economic evaluation, agronomic
assessment, and farmers/community assessment. These methods are discussed in detail in Chapters 8, 9
and 10. Advanced preparation for ex-post evaluation should include preside plans on documentation
needed, people to interview and sites to visit. Some supplementary information may need to be gathered
through surveys or interviews. Most evaluations use a blend of interviews, field visits, observations, and
report writing. Ex-post evaluation also tries to clarify the internal and external factors affecting the outcome
of the project.

Ex-post evaluation can provide important insights into the research process and provide a basis for
comparing alternative organizational methodological approaches. The lessons learned could be
systematically incorporated into subsequent evaluations making the processes much more relevant and
efficient.

8.4.4 Impact Evaluation

This is a form of ex-post evaluation- Impact evaluation attempts to determine the extent to which TDT
programs have contributed to larger development goals, such as increased farm production, or improved
food security, etc. Typically, it is conducted several years after the results have been released making it less
useful as a management tool than the other types of evaluation_ Ex-post impact assessments are often used
to convince policy makers to allocate more resources to research.

If the project and program evaluations are to be used to support impact evaluations, this should be
considered during ex-ante evaluations and the necessary baseline data and an M&E system should be set up
in advance to serve this purpose:-

Impact evaluation must distinguish between the contribution research makes to national development from
the contributions made by other factors such as existence of good extension services, agricultural inputs,
adequate infrastructure, and favourable marketing and pricing policies. It has been shown that benefits are
relatively easy to attribute in the case of single commodity technologies, such as high yielding varieties of rice
under irrigation in Asia. It has proved more difficult to do this in more diverse and complex systems as seen
in most of sub-Saharan Africa The key concepts in ex-post impact assessments are causality attribution and
incrementally.

Ex-post impact assessments usually require extensive and often expensive data collection and a thorough
analysis of socio-economic factors. The results of impact evaluations have broad implications for future
priority setting, not only for research, but also for development support services. They types of impacts and
methods used are discussed in the following sections,

8.5 Meaning of Impact

The term impact means different things to different people. In discussing the impact of any research
program, one can identify two broad categories of interpretations (Anderson and Herdt, 1990). In the first
category, some people look at the direct output of the activity and call this an impact, e.g., a variety, a breed,
or a set of recommendations resulting from a research activity. Most of the biological scientists belong to
this category. The second category goes beyond the direct product and tries to study the effects of this
product on the ultimate users, i.e., the so-called people level impact. The people level impact looks at how
fit the program is within the overall R&F to discover facts (research) that have practical beneficial application
(development) to the society: Impact begins to occur only when there is a behavioural change among the
potential users. This second type of impact deals with the actual adoption of the research output and
subsequent effects on production income environment and /or whatever the development objectives may be.

The people level impact of any research activity cannot be assessed without information about the (extent)
number of users and the degree (intensity) of adoption of improved techniques, and the incremental effects
of these techniques on the production costs and output. The adoption of any technology is determined by
several factors, which are not part of the original research activity.
In any comprehensive impact assessment, there is therefore a need to differentiate between the research
results and the contributions of research to development, i.e., the people level impact, and both aspects
should be addressed. Impact assessment is directed at establishing, with certainty, whether or not an
intervention is producing its intended effect. A program that has positive impact is one that achieves some
positive movement or change in relation to objectives. This implies a set of operational defined goals and a
criterion of success. There is also a need to establish that the outcome is the cause of some specified effort
As such, it is important to demonstrate that the changes observed are a function of the specific interventions
and can not be accounted for in any other way. As pointed out earlier the three basic principles to be
observed in any impact study are causality, attribution and increment.

8.6 Purpose of Impact Assessment

The purpose of impact assessments of agricultural technology development and transfer (TDT) activities
depends on when the assessment is done. Impact assessments can be undertaken More initiating the
research (ex-ante) or after the completion of the research activity (ex-post) including the technology' transfer.

The purpose of undertaking an impact assessment prior to starting a research project/ program is to assist
the research manager/search team in planning and priority setting activities. This will enable one to:
 Study the likely economic impact of the propos--,d research activity/ project;
 Formulate research priorities by examining the relative benefits of different research programs;
 Identify the optimal combination of research program, and;
 In addition, an ex-ante assessment can also provide a framework for gathering information to carry out
an effective ex-post evaluation.

Given the resource constraints confronting the research mangers and researchers, ex-ante impact
assessment is becoming a powerful planning tool in research management. The various purposes for
conducting an impact assessment after the completion of the program (ex-post) include:

 To study the impact and to provide feedback for researchers, research mangers planners and policy
makers;
 Lessons learned can be used to improve the management and decision making process with respect to
priority setting. Implementation, and management of research activities as well as technology transfer,
 For accountability purposes;
 To establish the credibility of the public sector research, and;
 To justify increased allocations of research resources.
8.7 Types of Impact
Impact studies can be carried out to study the impact of a particular innovation/ technology, on a research
program, or on a research program plus complementary services (such as extension, marketing, etc.). Impacts
can also be measured at the individual household level, target population level, as well as national and
regional levels (primary sector, or secondary sector, or overall economy).

The direct product of an agricultural research project! program may be an improved technology (embodied or
disembodied), specialized information, or research results (reports, papers and publications). See Box 8.2 for
a discussion of the direct product of research.

Box 8.2 Types of Research Outputs

The major outputs or R&D activities may be an improved technology or improved set of
information. Both types of output will eventually lead to improving the efficiency of agricultural
resources.

An improved technology on-farm can be comprised of:

 New enterprise, e.g.; a new legume crop species;
 Increased production, e.g., a new crop variety,
 Decreased production costs, e.g. a more efficient technology for the application of
chemicals;
 Increased quality, e.g. reduced contamination, increased oil content and
 Reduced risk, e.g., a more stable yielding crop variety

Off –farm
An improved technology of –farm can be comprised of
 Decreased handing transport/storage/ processing cost
 Decreased wastage/ spoilage; and
 Improved health.

Information
 Information can be about the existing technology or the new technology. Both types of
information are aimed at improving he returns to research investment some examples of
improved benefits from information systems are:
 Information on an existing technology which enhances adoption both on farm and on...
i.e. a more rapid adoption and /or a higher level of adoption of beneficial existing
technology
There is general consensus that an agricultural TDT effort in addition to producing the direct product of
 Better management decisions (strategic and) leading to higher profit
research could potentially lead to five different types of impacts (see Box 12.3), namely production impact,
 Better application rates timing and inputs;
economic impact, socio-economic impact, environmental impacts, and institutional impact. Institutional
 Improved fertilizer management on sandy sails;
impact refers to the effects of TDT efforts on the capacity of the research and extension programme to
 Quality of research;
generate and disseminate new production technologies. These different impacts and the appropri ate
 Institutional changes
methods to measure them are discussed in the following section.
 Reduced risk and;
 Facilitation of research
Figure 8.3: Comprehensive impact Assessment

Comprehensive impact assessment

Intermediate Direct product of Research People Level Impact

Institutional Changes in
Changes enabling Economic Social/Cultural Environmental
impact Impact impact
Environment

Direct Effects Spill-Over Effects

Table 8.1 Impact Types Techniques, 2nd Methods Used in a Comprehensive Assessment

IMPACT TYPE TECHNIQUE METHOD

INTERMEDIATE IMPACT
Simple Comparison Trend
- Institutional changes Survey
Analysis
- Changes in the Enabling environment

Simple Comparison Target vs.

Effectiveness Analysis
DIRECT PRODUCT OF RESE4=CHI Actual _ Target vs
Using, Logical Framework
I Actual

ECONOMIC IMPACT Various RR estimate

Comparison Over Time Adoption

SOCIO-CULTURAL IMPACT Survey Socio-economic Survey/
Adoption Survey

Various: Qualitative &

ENVIRONMENTAL IMPACT ~ Environmental
.Quantitative

Need Bio-physical information

Based on the previous discussions there are three broad categories of impact that form part of a
comprehensive impact assessment exercise. The first is the direct outcome of the research activities. The
second the intermediate impact is concerned with the organizational strategies and methods used by
researchers and other actors in conducting more effective technology development and transfer. This is the
so called people level impact. The people level impact can be economic socio-economic socio-cultural and or
environmental. The various types of impact are summarized in figure 12.3
8.8 Overview of Impact Assessment Methods

A comprehensive impact assessment should simultaneously assess the various impact of the TDT.
The various techniques and methods used to assess the different types of impact are summarized in
table 12.1 and discussed in the subsequent sections.

8.8.1 Direct Product of Research - Effectiveness Analysis

The most commonly used approach for assessing the direct product of research is known as effectiveness
analysis. A useful starving point for effectiveness analysis is the local framework of the project The logical
framework permits the assessment of the degree to which the research activities have made changes in the
desired direction. The logical frame work : its,-If is a simple matrix provides a structure for one to specify
the components of a program/ activity and' the logical linkages between the set of means (inputs and
activities) and the set of ends (outputs). This logical framework makes the impact assessment process
transparent by explicitly stating the underlying assumptions of the analysis.

The effectiveness analysis is a simple comparison of these targets to actual or observed performance of the
project. Three sets of comparisons are identified in the literature.” before" and "after" comparison (also called
historical comparison); "with" and "without" comparison; and "target" vs. "achievement t" comparison. The
most useful comparison is "target" vs. "achieved". The targets need to be completely achieved for the project
to be deemed effective. The movement in the direction of the desired target is evidence of project
effectiveness.

8.8.2 Evaluating the Impact of Intermediate Product(s)

The link between the intermediate product and the ultimate economic benefit is not clear and,
therefore, tends to be ignored in most impact assessment studies. The evaluation of the
intermediate product is made difficult by the fact that the benefits of these products are not easy to
quantify. Thus, most studies acknowledge the fact that having the institutional capacity to conduct
agricultural TDT is of paramount importance. These studies, however, do not include the benefits in
the assessment of the impact. The costs of the practice have been to trace the changes in
institutional capacity over time using either simple trend analysis or comparisons. This requires
baseline information on these indictors and careful monitoring. The results from these analyses can
be incorporated in the quantitative analysis through a multi-criteria analysis.

8.8.3 People Level Impact

As pointed out earlier, the people level impact can be economic, socio-Cultural, and environmental.

8.8.3.1 The Economic Impact

The economic impact of TDT initiatives can be traced through its effect on production and income. The
approach used is called the efficiency analysis. Efficiency analysis assesses the people level impact by
comparing the benefits that society gets from TDT and the cost incurred in conducting TDT programs. The
benefits and costs are normally collapsed into a single number, the Rat:. of Return (RoR). There are two broad
ways of calculating the rate of return to TDT: ex-ante and ex-post The ex-ante methods are useful as
research planning tools as they aid in the selection of the research portfolio, priority setting, and resource
allocation. The ex-post studies are useful for justifying past TDT investments, and demonstrating the payoff
of such investments.
The ex-ante methods for estimating RoR include benefit- cost analysis, simulation models, and mathematical
programming models- The last two methods are data and skill intensive and, therefore, rarely used.

Ex-post methods for RoR estimation can be divided into two broad groups, as shown in figure 12.4 The
econometric method uses the production function in which research and transfer activities are considered
inputs and gives the marginal rate of return MRR) to agricultural TDT The MRR quantifies the returns to the
Last dollar expended in the research project To determine the optimal allocation of funds, it is necessary to
know the marginal benefit of the last research dollar invested. This is the only method that allows for the
separation of the effects of research from those of extension and other support services. However, the data
requirements have reduced the extensive use of this method.

The second group of methods are the surplus approaches. These methods calculate the benefits of TDT as
the net change in producer and consumer surplus, employing a partial equilibrium analysis. The different
techniques are based on the difference in the assumed nature and elastic ties of the supply and demand
functions. The benefit-cost approach has various combinations of the nature of the supply shift and the
functional form of the supply and demand cures. The cost-saving approach is in between these two
approaches. But based on the same theoretical foundation.

These methods calculate the average rate of return (ARR). The average or internal rate of return takes the
research expenditure as given and calculates the RoR for the project or program in its entirety: This provides
information to assess the success of the project in terms of generating adequate returns. However, the ARR
measure is not always helpful in determining if the allocation of research funding to the project was
appropriate. Because of the historic nature of ex-post evaluation, the results of these studies have mainly
been used as political instruments to secure future funding. They demonstrate how efficient past investments
were, but not necessarily where research resources should be allocated in the present, or the future. For a
detailed description of the various techniques see Anandajayasekeram et. al., (1996). For our purposes a
simple technique such as a partial budget and cost benefit framework can be effectively used to estimate RoR
of TDT efforts. The different techniques used to estimate the RoT are discussed individually in the
subsequent chapters.

8.8.3,2 Socio- Cultural Impact

Socio-cultural impacts include the effects of research on the attitude, beliefs, resource distribution, status of
women, income distribution, nutritional implications, etc, of the community. These can be assessed through
socio-economic surveys and careful monitoring. To be cost effective, appropriate socio-cultural questions
can be included in adoption survey questionnaires.

8.8_3.3 Environmental Impact

The adoption of modern agricultural technologies has often resulted in external benefits and costs largely
through its effects on the environment. For example, the use of fertilizers or pesticides may lead to surface
and ground water contamination by toxic chemical and algae, resulting in significant environmental costs.
On the other hand, adoption of minimum tillage technology and herbicides by farmers has probably had
environmental benefits in the form of reduced soil erosion and nutrient loss.

The full assessment of environmental quality issues requires complex analysis of physical, biological, social,
and economic processes. This also leads into some measurement problems. Such a breadth of analysis is
likely to be beyond the scope of most agricultural research assessment activities. Nevertheless, some
assessment of environmental impact is necessary when evaluating agricultural research, especially where the
environmental impact of the application of the research is likely to be significant. In the absence of data
required for a thorough analysis, it may still be possible to identify qualitatively the nature of the social
benefits and costs, together with the likely gainers and losers.

12.8.3.4 Impacts of Technologies

Technologies often have impacts in more than one area For example:
Improvement in one or more categories can be partially offset by a decline in another category:
- Higher quality may be achieved at the cost of lower yields or higher costs;
- Increased yield or quality may be at the cost of higher risk; and

- Decreased risk could be accomplished with a reduction in yields.

Research often has benefits in more than one category-:

- Breeding of new grain legumes has resulted In higher yields for subsequent crops lower "N”
requirements of vv heat crops, and higher protein levels in wheat, and;
- Field trials of a new crop may serve to promote adoption and to fine-une agronomic management
practices.

The impact of research is often not confined to the enterprise, which was the subject of the research:
- Increased profitability of A:
- Draws resources from alternative enterprises, and:
- Imposes an opportunity cost that needs to be recognized:
- There could also be positive spin-offs, e.g. grain legumes and fixation of nitrogen.

All aspects need to e considered in assessing the impact of any technology