CHAPTER ONE

INTRODUCTION TO PROJECT

1.1 Definition

A project is an activity that:

•is temporary having a start and end date
•is unique
•brings about change
•has unknown elements, which therefore create risk
Generally projects are formed to solve a problem or take advantage of an opportunity.

Common Project Terms

Deliverables: Tangible ‘things’ that the project produces

Milestones: Dates by which major activities are performed.
Tasks: Also called Actions. Activities undertaken during the project
Risks: Potential problems that may arise
Gantt chart: A specific type of chart showing time and tasks.
Stakeholder: Any person or group of people who may be affected by your project

Project Management

Definition

A simple definition of project management includes a handful of key premises:

 Project management is no small task.

 Project management has a definite beginning and end. It's not a continuous process.

 Project management uses various tools to measure accomplishments and track project
tasks. These include Work Breakdown Structures and Gantt charts.

 Projects frequently need ad-hoc resources rather than dedicated, full-time positions
common in organizations.

 Project management reduces risk and increases the chance of success.

Often, a triangle, commonly called the "triple constraint", is used to summarize project
management (see Figure1below). The three most important factors are time, cost and scope.
These form the vertices with quality as the central theme.

Fig
ure 1: The triple constraint

In words, the triple constraint has four core elements:

 Projects must be within cost.

 Projects must be delivered on time.

 Projects must be within scope.

 Projects must meet customer quality requirements

1.2 Project Manager's Roles

The role of the project manager is one of great responsibility. The project manager's job is to
direct, supervise and control the project from beginning to end. Project managers should not
carry out project work - managing the project is enough. Here are some of the activities a project
manager undertakes:

 The project manager must define the project, reduce it to a set of manageable tasks,
obtain appropriate resources and build a team to perform the work.
  The project manager must set the final goal of the project and motivate the project team
to complete the project on time.

 The project manager must inform all stakeholders of progress on a regular basis.

 The project manager must assess and monitor risks to the project and mitigate them.

 No project ever goes quite as planned. Project managers must learn to adapt to and
manage change.

Project Manager's Skill Set/Competencies

A project manager must have a range of competencies:

 Leadership

 People management (customers, suppliers, functional managers and project team)

 Effective communication (verbal and written)

 Influencing

 Negotiation

 Conflict management

 Planning

 Contract management

 Estimating

 Problem solving

 Creative thinking

 Time management

Project managers bear ultimate responsibility for making things happen. Traditionally, they have
carried out this role as mere implementers. To do their jobs they needed to have the necessary
administrative and technical competencies.

Today they play a far broader role. In addition to the traditional skills, they need to have business
skills, customer relations skills, and political skills.

Psychologically, they must be results-oriented self-starters with a high tolerance for ambiguity
because little is clear-cut in today's tumultuous business environment. Shortcomings in any of
these areas can lead to project failure.
1.3 Types of projects

You may be wondering what the different types of projects are. Project management covers
the management of projects and their running. Not all projects are the same and vary on a
number of different elements that make each project individual. These factors differ project
among themselves must be taken into consideration so that projects can be managed efficiently
and effectively regarding each project type.

Project scope: This describes the reach and scale of the project. A project scope varies
depending on the amount of people involved and the scale of the impact of its outcomes. Projects
can be big or small depending on the scope.

Timeframe: A project’s timeframe is defined from its initiation or conception until result
evaluation. A project’s timeframe can also be divided into smaller blocks which in themselves
have their own timeframe.

Organization: The organization of a project refers to how tasks and activities are organized and
prioritized. The project workflow is calculated in each individual project to reach objectives.
Cost: Projects can be expensive or relatively cheap depending on their overall cost.

Communication: What are the types of project that require communication? Communication is
the cornerstone of every project. Among different types of projects, communication, its
frequency and its format can vary. However, without effective communication a project will
fail.

Stakeholder Management: Projects can vary depending on the number of stakeholders

involved. Sometimes, the only stakeholder involved in a project is the team and project manager,
but more often than not, there are a wider group of stakeholders involved. The more
stakeholders, the more complex the management of their expectations and communications.

Task assignation: Within the different types of projects in project management, there are many
different tasks and activities. Projects can vary depending on how these tasks are assigned to
team members- whether they will be completed by individual members or groups and how
responsibilities will be defined.

Quality of results: Results of projects vary among the different types of projects.

They can vary depending on each client’s requests.

1.4 Characteristics of Project

Following are some of the important characteristics of project.

  Project is temporary with certain starting & ending date.
 The opportunities and teams of the project are also for temporary duration.
 Projects are ended when the goals are accomplished or when the goals are not achievable.
 Multiple resources are involved in the projects along with the close coordination.
 Interdependent activities are involved in the project.
 A unique product, service or result is developed at the end of the project. There is also
some extent of customization in the project.
 There is also some sort of connection in the activities of the project. Some sequence or
order is also required in the activities. The output of certain activity becomes the input of
another activity.
 There is element of risk in the project.

1.5Classification of Projects:
Projects are classified based on several criteria, including: ownership, source of finance, and
forces behind the projects.
1. Based on ownership:
a. Private sector- mostly projects undertaken by business enterprises.
b. Public sector- projects undertaken by national and local government bodies.
c. NGOs- development projects are most often undertaken by non-government and non-
for profit organizations.
2. Based on the Sources of Finance:
a. Government treasury- projects may be entirely financed by government budget as
per its priority. For instance, construction of regional airport.
b. Government treasury and external sources - most projects are financed by the joint
partnership of the government and donor groups. For example, a road project may be
financed 50% by the government and 50% by a foreign donor.
c. External sources of Finance- projects may be financed totally by parties other than
the government but established for the wellbeing of the citizens and the ownership
may be for the government or the public.
3. Based on the forces Behind:
a. Demand driven/need driven- based on identified unsatisfied demand project can be
created or on unsatisfied basic needs like food, water and shelter.
b. Donor driven- the force behind the financing organization. Donors will have their
own say and influence the types of projects to be established.
c. Political Driven- Projects may be established in response to some political situation
such as for example because of national elections, projects by religious organizations.
4. Based on their nature:
a. Civil engineering, construction, petrochemical, mining, quarrying, projects far away
from the contractor’s home office, and involve special risk as well as problems of
organizational communication.
 b. Manufacturing projects- conducted in a factory or other home based environment
and enable exercising on the spot management.
c. Research projects- established for pure research consuming large sum of money and
lasting over years resulting in dramatic profitable discovery or proving waste of
money.
d. Management projects- projects that require the employment of an external project
manager or managing contractor for issues such as relocating headquarters,
developing and introducing a new computer system, preparing for a trade exhibition,
producing a feasibility or other study report, restructuring the organization etc.

1.6 Project management/Business environment

It is important for every projects/business organization to interact and transact with its
environment because the projects/business environment has direct relationship with the
organization/project. The success or failure of an organization/project is primarily established by
the effectiveness of its interaction with its environment. Kotler and Armstrong (2004) explain
that it is important for the projects/business to identify with the environment of its operation and
devise its policies in relation to the forces in that environment.

Environmental factors can have an impact on project management even in environments that are
relatively stable. From access to capital, to access to technology, to access to people, projects
will succeed or fail based on the project leaders ability to make maximum use of available
resources. In addition, unanticipated changes in the environment can cause even the most well-
managed and smoothly proceeding project to lose momentum.

Political environment

The political environment of any country influences the business to a larger extent. This political
environment is influenced by the political organization, philosophy, government ideology, nature
and extent of bureaucracy, the country’s political stability, its foreign policy, defense and
military policy, the country’s image and that of its leaders both locally and internationally
(Shaikh 2010).

Economic environment

Economic factors that influence the business are the collective of the nature of the country’s
economic system, its structures, and economic policies, how the capital market is organized, and
nature of factors of production, business cycles, and socio-economic infrastructure. Any
successful organization pictures out the external factors that affect the business, anticipates the
prospective market situations and work to minimize the costs while maximizing the profits.
Social environment

The country’s social environment affects the functioning of the business since it determines the
value system of the society. Sociological factors establish the culture of work, labor mobility,
work groups etc, hence, business operation of an enterprise. These factors include cost structure,
customs and conventions, cultural heritage, peoples’ view towards wealth and income and
scientific methods, seniority respect, mobility of labor (Shaikh 2010). All these factors have big
impact on the business. For example, peoples’ demand determine the kind of products to be
offered for sale; this demand is consequently affected by peoples’ attitudes, customs, cultural
values, fashion and other related forces. The code of conduct that is supposed to be followed by
the business is determined by the socio-cultural environment.

The social changes in life also lead to new fashion trends that affect business in any part of the
economy. For example, fashion-based demands are social based forces that lead to changes or
increase in demand. The higher the demand as portrayed in line three demand, the higher the
sales level as well as the business performance. The lower the demand as portrayed in line two
the lower the level of returns attained.

Technological environment

Technological factors affects business concerning technological investment, technological

application and the effect of technology on markets. Therefore, any technological advancement
affects highly the business in a country. The type and quality of goods and services to be
produced and the type and quality of plant and equipment to be used in a company, is determined
by the kind of technology employed by that company (Mühlbacher, Dahringer&Leihs 2006).

Legal environment

Legal factors involve how flexible and adaptable the law and legal rules that govern the business
are. It also includes the exact rulings and courts decision. Legal provisions may also contribute to
more or less income depending on the environment of operation.

1.7 Project organization

Project organization is a process, which provides the arrangements and decisions about the
realization and the process of the project. Such tasks as organization of the project process,
planning of the project frameworks (costs, deadlines, personnel etc.) should be carried out; all
project requirements should be given to the project stakeholders during this process. Generally,
the project organization is the structuring, organization and configuration as well as project
process according to the plan. It provides the teamwork of the participants proceed as efficient as
possible according to the inserted rules, standards and values of the project. The roles and
responsibilities are divided, the rules of the teamwork are determined and the information system
is defined during the project organization.

The project organization is divided into three areas of competence and responsibility. The project
leadership is responsible for the whole management of the project and the project team
implements the actual project. The third area is a project board, which is a supreme decision-
making body, can define the project successes or cancel a project.
 CHAPTER TWO

THE PROJECT CYCLE

2.1. Meaning of Project Cycle

The project is initiated to achieve a mission and is said to be completed when the mission is
achieved. The project lives between these two cut off periods and this intermediate time is called
Project Life Cycle. Project life cycle consists of the following three stages:
1) Pre-Investment Phase: It is concerned with formulation of objectives, demand forecasting,
and evaluation of impute characteristics, selection of strategy, projections of financial profile,
cost benefit analysis and finally pre-investment appraisal. Some expenditure has to be incurred in
the form of conducting surveys, feasibility studies etc.
2) Construction Phase: This stage consumes maximum expenditure. Construction phase
consists of developing the infrastructure for the project. The capital requirement includes cost on
land, buildings, civil works, machinery equipment, ancillaries etc.
3) Normalization Phase: The primary objective of this stage is to produce the goods and
services for which the project was established. The expenditure has to be incurred

There are alternative models that deal with the project cycle. However, in this text, and
exclusively in this chapter, more emphasis will be given to the two basic Models that are widely
accepted as a model of project by institutions, analysts, and mostly dealt in academic literatures.
These are: “The Baum Cycle (also called the World Bank Project Cycle)” and “The UNIDO
Project Cycle”.

2.2. The Baum Cycle (World Bank Project Cycle)

A project with the characteristic already outlined in first chapter typically run through at least
several separable stages of activities that can be thought of as constituting a definite sequence,
which some writers and institutions have called “a project cycle”. In this regard, the first basic
model of a project cycle developed by Warren. C. Baum in 1970 was by then adopted by the
World Bank as a project cycle. Initially, this model had recognized only four main stages in the
project cycle, namely:

 Identification
 Preparation
 Appraisal and Selection
 Implementation
Later in 1978, the author has added additional two stages called “Negotiation” and
“Evaluation”. In this version of the Baum model, negotiation comes after projects pass the
appraisal process and become a candidate for realization. It is after appropriate negotiations that
projects become implementation entity. And then, projects that are implemented will be the
concern for evaluation, which usually closes the cycle as it gives rise to the identification of new
projects. This model, therefore, includes a total of six identifiable stages in the project cycle. The
World Bank accepted the amendment and hence, this new version has been in use since then.
Thus, each of Baum’s main stages is discussed briefly below:

1. Identification :

The first stage in the project cycle and in the planning process is to find potential projects. The
sources of projects may be one or more of the following:

 Some may be “resource based” and stem from the opportunity to make profitable use of
available resources.
 Some projects may be “market based” arising from an identified demand in home or
overseas markets.
 Others may be “need-based” where the purpose is to try to make available to all people
in an area of minimal amounts of certain basic material requirements and services.
 Well-informed “technical specialists” and “local leaders” are also common sources of
projects. Technical specialists could identify many areas where they feel new investments
might be profitable, while local leaders may have suggestions about where investments
might be carried out.
 Ideas for new projects also come from “proposals to extend and/or expandexisting
programs and projects” as well as from identifying technological alternatives.

In general, most projects start as an elementary idea. Eventually, some simple ideas are
elaborated into a form to which the title “project” can be formally applied.

2. Preparation:

Once projects have been identified, there begins a process of progressively more detailed
preparation and analysis of project plans. At this stage, the project is being seriously considered
as a definite investment action. Project preparation,(also called project formulation), involves
pre-feasibility and feasibility studies and covers the establishment of commercial, technical,
institutional, financial, and socio-economic feasibility. Decisions have to be made on the scope
of the project, location and site, soil and hydrological requirements, project size (farm or factory
size), etc.

Resource based investigations are undertaken and alternative forms of projects are explored.
Complete technical specifications of distinct proposals accompanied by full details of financial
and economic costs and benefits are the outcome of the project preparation stage. The project
now exists as a set of tangible proposals. Practically, project design and formulation is an area in
which local and international consultants are very active, especially for big projects that cover
large areas and have big budgets.

3. Appraisal and Selection:

After a project has been prepared, it is generally appropriate for a critical review or to conduct an
independent appraisal. This provides an opportunity to re-examine every aspect of the project
plan and determine whether the proposal is appropriate and sound or not before large sums are
committed. Generally, internal government staffs only are used for this work and not consultants
and projects are appraised both in the field and at the desk level. Appraisals should cover at least
seven aspects of a project, each of which must have been given special consideration during the
project preparation phase:

a. Technical: here the appraisers concentrate in verifying whether what is proposed will
work in the way suggested or not.
b. Financial :the appraisers try to see if the requirements of money needed by the project
have been calculated properly, their sources are all identified, and reasonable plans for
their repayment are made where necessary.
c. Commercial: the way the necessary inputs for the project are conceived to be supplied is
examined and the arrangements for the disposal of the products are verified.
d. Incentive: the appraisers see to it whether things are arranged in such a way that all those
whose participation is required will find it in their interest to take part in the project, at
least to the extent envisaged in the plan.
e. Economic: the appraisers here try to see whether what is proposed is good from the
viewpoint of the national economic development interest, all project effects (positive as
well as negative) are taken into account, and check if all are correctly valued.
f. Managerial: this aspect of the appraisal examines if the capacity exists for operating the
project and see if those responsible ones can operate it satisfactorily. Moreover, it tries to
see if the responsible are given sufficient power and scope to do what is required.
g. Organizational: the appraisers examine the project it is organized internally and
externally into units, contract, policy, institution, etc so as to allow the proposals to be
carried out properly and to allow for change as the project develops.

The appraisal process builds on the project plan but may involve new information if the appraisal
team feels that some of the data used at preparation or some assumptions are faulty. The
implications of the project on the society and the environment are also more thoroughly
investigated and documented. Similarly, the technical design, financial measures, commercial
aspects, incentives, and economic parameters are thoroughly scrutinized. These issues are the
subjects of specialized appraisal report. On the basis of an appraisal report, decisions are made
about whether to go ahead with the project or not. The appraisal may also change the project plan
or develop a new plan, that is, comment made at the appraisal stage frequently give rise to
alternations in the project plan (project appraisal).

After appraisal, the viable project proposals are chosen for implementation on the basis of the
priorities of the stakeholders and the available resources. For instance, Treasury may impose a
ceiling on the ministries with a big portfolio of investments, calling for prioritization of the core
and lower priority projects. In practice, there can be quite a sequence of project selection
decisions. Following appraisal, some projects may be discarded. If the project involves loan
finance, the lender will almost certainly wish to carry out its own appraisal before completing
negotiations with the borrower.

4. Negotiation and Financing :

Once the project to be implemented is agreed on, for donor funded projects, discussions are held
on funding and associated aspects of funding such as conditions for grants, repayment period,
interest rates on loans, flow of funds, contributions from stakeholders, and whether there is co-
financing or not. This culminates into an “Agreement Document” for the project, which binds
all the parties involved during implementation of the project.

5. Implementation:

The objective of any effort in project planning and analysis clearly is to have a project that can
be implemented to the benefit of the society. Thus, implementation is, perhaps, the most
important part of the project cycle. In this stage, funds are actually disbursed to get the project
started and keep running. A major priority during this stage is to ensure that the project is carried
out in the way and within the period that was planned. Problems frequently occur when the
economic and financial environment at implementation differs from the situation expected
during appraisal.

Frequently, original proposals are modified, though usually only with difficulty, because of the
need to get agreement between the parties involved. It is during implementation that many of the
real problems of projects are first identified. Because of this, the feedback effects on the
discovery and design of new projects and also the deficiencies in the capabilities of the project
actor can be revealed. Therefore, to allow the management to become aware of the difficulties
that might arise, recording, monitoring, and progress reporting are important activities during the
implementation stage.

Some of the aspects of implementation that are of particular relevance to project planning and
analysis are the following:

 The first is that, the better and more realistic a project plan is, the more likely it is
that the plan can be carried out and the expected benefits realized.
  The second is that, project implementation must be flexible. Circumstances will
change and project managers must be able to respond intelligently to these
changes. The common ones are: technical changes (soils, water logging, and
nitrogen application); price changes; economic policy and environmental changes;
political changes, etc. and these all will alter the ways in which projects should be
implemented.
6. Evaluation:

The final phase in the project cycle is evaluation. Once a project has been carried out, it is
often useful, (though not always done), to look back over what took place, to compare actual
progress with the plans, and to judge whether the decisions and actions taken were
responsible and useful. The extent to which the objectives of a project are being realized
provides the primary criterion for an evaluation. The analyst looks systematically at the
elements of success and failure in the project experience to learn how better to plan for the
future.

Evaluation is not limited only to completed projects. It is a most important managerial tool in
on-going projects and rather, formalized evaluation may take place at several times in the life
of a project. Evaluation may be undertaken when the project is in trouble as the first step in a
re-planning effort. Careful evaluation should precede any effort to plan for new projects and
it is also needed to follow-up the progress of projects. And, finally evaluation should be
undertaken when a project is terminated or is well into routine operation.

Different groups or units may do the evaluation of projects. Among others,

 Project’s management unit often continuously evaluates its experience as

implementation proceeds.
 The sponsoring agency, perhaps, the operating ministry, the planning agency, or an
external assistance agency may undertake evaluation.

In large and innovative projects, the project’s administrative structure may provide a separate
evaluation unit responsible for monitoring the projects implementation and for bringing
problems to the attention of the projects’ management. Evaluation can help not only in the
management of the project after the initial phase, but also help in the planning of future projects.
Experience with one project can give rise to new ideas for extension of the project, repetition, the
need for “vertically” associating projects that supply inputs to or process products from this
project, and other ideas which become the seeds to generate new project proposals.

2.3. The UNIDO Project Cycle

The UNIDO has established a project cycle comprising the following three distinct phases:

1. The pre-investment phase

 2. The investment phase, and
3. The operating phase.

Each of these three phases is divided into stages, some of which constitute important
consultancy, engineering, and industrial (manufacturing) activities. In this regard, increasing
importance should be attached to the pre-investment phase as a central point of attention,
because the success or failure of an industrial project ultimately depends on the marketing,
technical, financial and economic findings and their interpretations, especially in the feasibility
study. To reduce wastage of scarce resources, a clear comprehension of the sequence of events is
required when developing an investment proposal from the conceptual stage by way of active
promotional efforts to the operational stage.

1. The pre-investment phase:

According to the UNIDO manual, the pre-investment phase comprises several stages:

(A) Opportunity Studies

The identification of investment opportunities is the starting-point in a series of investment-

related activities, when potential investors (private or public) are interested in obtaining
information on newly identified viable investment opportunities. The main instrument used to
quantify the parameters, information, and data required to develop a project idea into a
proposal is the opportunity study, which should analyze:

 Natural resources
 The existing agricultural base (it may be the basis for agro-industries)
 Future demand for consumer goods
 Imports substitution and export possibilities
 Environmental impacts (mandatory or non-revenue producing projects)
 Expansions of existing capacity
 Manufacturing sectors (successful in other countries)
 Diversification

Opportunity studies are rather sketch in nature and rely more on aggregate estimates than on
detailed analysis. Opportunity studies could be general or specific.

 General opportunity studies (“sector approach") could be area studies designed to

identify opportunities on a given area (Administrative province, backward region);
industry studies to identify opportunities in delimited industrial branch; and resource-
based studies to reveal opportunities based on the utilization of natural, agricultural, or
industrial resources.
 Specific project opportunity studies (“enterprise approach”) are seen in the form of
products with potential for domestic manufacture. A specific project opportunity study
 may be defined as the transformation of a project idea into a broad investment
proposition.

A project opportunity study should not involve any substantial cost in its preparation, as it is
intended primarily to flashlight the principal investment aspects of a possible industrial
proposition. The purpose of opportunity study is to arrive at a quick and inexpensive
determination of salient facts of an investment possibility.

(B) Pre-Feasibility Studies

The project idea must be elaborated in a more detailed study. However, formulation of a
feasibility study that enables a definite decision to be made on the project is a costly and time-
consuming task. Therefore, before assigning larger funds for such a study, a further assessment
of the project idea might be made in a pre-feasibility study. This is to see if:

All possible project alternatives are examined,

The project concept justifies detail study,
All aspects are critical and need in-depth investigation, and
The project idea is viable and attractive or not.

A pre-feasibility study should be viewed as an intermediate stage between a project opportunity

study and a detailed feasibility study, the difference being in the degree of detail of the
information obtained and the intensity with which project alternatives are discussed. The
structure of a pre-feasibility study should be the same as that of a detailed feasibility study.

(C) Support/Functional/Studies

Support or functional studies cover aspects of an investment project, and are required as
prerequisites for, or in support of, pre-feasibility and feasibility studies, particularly for large-
scale investment proposals. This may include:

Market studies of products

Raw material and factory supply studies
Laboratory and pilot plant tests
Location studies
Environmental impact assessment.
Economies of scale studies
Equipment selection studies
(D) Feasibility Studies

A feasibility study should provide all data necessary for an investment decision. The
commercial, technical, financial, economic, and environment prerequisites for an investment
project should, therefore, be defined, refined and critically examined based on alternative
solutions already reviewed in the pre-feasibility study. The results of these efforts is then a
project whose background conditions and aims have been clearly defined in terms of its control
objective and possible marketing strategies, the possible market shares that can be achieved, the
corresponding production capacities, the plant location, existing raw materials, appropriate
technology and mechanical equipment and, if required, an environmental impact assessment.

The financial part of the study covers the scope of the investment, including the net working
capital, the production and marketing costs, sales revenue, and the return on capital invested.
Final estimates on investment and production costs and its subsequent calculations of financial
and economic profitability are only meaningful if the scope of the project is defined
unequivocally (clearly) in order not to omit any essential part and its related cost.

There is no uniform approach or pattern to cover all industrial projects of whatever type, size or
category. The emphasis on the components varies from project to project. For most industrial
projects, however, there is a broad format of general application-bearing in mind that the larger
the project the more complex will be the information required. Although feasibility studies are
similar in content to pre-feasibility studies, the industrial investment project must be worked out
with the greatest accuracy in an iterative optimization process, with feedback and inter-linkages,
including the identification of commercial, technical, and entrepreneurial risks.

The sensitive parameters such as the size of the market, the production program, or the
mechanical equipment selected should be examined more closely. A feasibility study should be
carried out only if the necessary financing facilities, as determined by the studies, can be
identified with a fair degree of accuracy. There would be little sense in a feasibility study without
the reliable assurance that, in the event of positive study findings, funds could be made available.
For that reason, possible project financing must be considered as early as the feasibility study
stage because financing conditions have a direct effect on total costs and, thus, on the financial
feasibility of the project.

(E)Appraisal Report

When a feasibility study is completed, the various parties will carry out their own appraisal of
the investment project in accordance with their individual objectives and evaluation of expected
risks, costs, and gains. Large investment and development finance institutions have a formalized
project appraisal procedure and usually prepare appraisal reports. This is the reason why project
appraisal should be considered an independent stage of the pre-investment phase, marked by the
final investment and financing decisions taken by the project promoters.

The appraisal report will prove whether the pre-production expenditures spent since the initiation
of the project idea were well spent or not. Project appraisal as carried out by financial institutions
concentrates on the health of the company to be financed, the returns to be obtained by equity
holders and the protection of its creditors. The techniques applied to appraise projects in line
with these criteria center around technical, commercial, market, managerial, organizational, and
financial and possibly also economic aspects.
2. The Investment/implementation Phase

The investment or implementation phase of a project provides wide scope for consultancy and
engineering work, first and foremost in the field of project management. The investment phase
can be divided into the following stages:

 Establishing the legal, financial, and organizational framework

 Tendering, evaluation of bids, and negotiations
 Technology acquisition and transfer
 Detailed engineering design and contract, including tendering, evaluation of bids and
negotiations
 Acquisition of land, construction work and installation
 Pre-production marketing, including the securing of supplies and suppliers and setting up
the administration of the firm.
 Recruitment and training of personnel
 Plant commissioning and start-up
3. The Operating Phase

The problem of the operating phase needs to be considered from both a short and a long-term
view point.

 The short-term view relates to the initial after commencement of production when a
number of problems may arise concerning such matters as the applications of production
techniques, operation of equipment, or inadequate labor productivity owing to lack of
qualified staff and labor. Most of these problems have their origin in the implementation
phase.
 The long-term view relates to chosen strategies and the associated production and
marketing costs as well as sales revenues. These have a direct relationship with the
projections made at the pre-investment phase. If such strategies and projection prove
faulty, any remedial measures will not only be difficult but may prove highly expensive.
 CHAPTER THREE

PROJECT IDENTIFICATION

3.1. Meaning of Project Identification

Project Identification is the process of searching for and subsequently finding potential projects
that could feasibly generate benefits in excess of costs accruing to the society and contributing
towards the attainment of specified development objectives. Project identification is made in
rather general terms with broader scope at the first glance and then, the idea will be progressively
developed. In the continuum, even alternative versions of the same may be conceived.

The search for promising project ideas is the first step towards establishing a successful venture.
The key to success lays in getting into the right business at the right time. The objective is to
identify investment opportunities, which are prima facie feasible and promising and merit further
examination and appraisal. Project identification is the process identification should be an
integral part of the micro-planning exercise, with Sectorial information and strategies being the
main sources of project ideas.

In practice, however, projects do not always derive from national and sectorial plans. Instead,
they may originate from several sources. Irrespective of their origin, project ideas, in general,
should aim at overcoming constraints on the national development efforts, be it material, human,
or institutional constraint, or at meeting unsatisfied needs, and demand for goods and services.
Constraints, needs, and demands should be interpreted broadly to include, for instance, foreign
exchange constraints that might indicate the need to undertake projects for export promotion or
import substitution.

Who Identify Projects?

The following groups may identify projects:
 Small producers organizations/producers’ unions
 Large scale individual private sector producers
 Product marketing organizations
 Private sector companies (local/multinational)
 State owned enterprises & organizations
 Government ministries, authorities, agencies, and commissions
 Development banks, local as well as foreign, and international development agencies
 Other aid agencies and self-aid associations
 Local governments; state, regional, and sub-regional authorities
 Local political & pressure groups such as oppositional parties
 NGO’s: Local or international
 Credit institutions & cooperatives
 Credit unions, saving and loan associations, saving banks, commercial banks, etc.
3.2. Sources of Project Ideas
Macro Source of Project Ideas
Specifically, project ideas emerge from the following macro sources:
 National policies, strategies, and priorities as may be enunciated(or articulated) by
government from time to time
 National, Sectorial, sub-Sectorial, or regional plans and strategies supplemented by
special studies, sometimes called opportunity studies, conducted with the explicit aim of
translating national, Sectorial, sub-Sectorial, and regional programs into specific projects.
 General surveys, resource potential surveys, regional studies, master plan, and statistical
publications, which indicate directly or indirectly investment opportunities
 Constraints on the development process due to shortage of essential infrastructure
facilities, problems in the balance of payments, etc.
 Government decisions to correct social and regional inequalities or to satisfy basic needs
of the people through development projects.
 A possible external threat that necessitates projects aiming at achieving, for example,
self-sufficiency in basic material, energy, transportation, etc
 Unusual events such as droughts, floods, earthquakes, hostilities, etc
 Government decisions to create project-implementing capacity in such areas as
construction, etc.
 At the macro-level, project ideas can also originate from multilateral or bilateral
agreements, development agencies, and as a result of regional or international agreements
in which the country participate
 In addition, inspirations of individuals and institutions, workshops, and development
experiences of other nations may point to some interesting project ideas in the local
context.

Micro Source of Project Ideas

There are quite diverse micro-sources of project ideas that emanate from:

 The identification of unsatisfied demand or needs

 The existence of unused or underutilized natural or human resources and the perception
of opportunities for their efficient use
 The need to remove shortages in essential materials, services, or facilities that constrain
development efforts
 The initiative of private or public enterprises in response to incentives provided by the
government
 The necessity to complement or expand investments previously undertaken
  The desire of local groups or organizations to enhance their economic status and improve
their welfare
 Analyze the performance of existing industries
 Examine the inputs and outputs of various industries
 Review imports and exports
 Look at the suggestions of financial institutions and development agencies
 Investigate local materials and resources
 Analyze Economic and Social Trends
 Study new Technological Developments
 Draw clues from consumptions abroad
 Explore the possibility of reviving sick units
 Attend trade-fairs (trade promotion)
 Project proposals may also come from multinational firms, in response to government
investment incentives or else when such firms consider production within the country is a
better way to secure a substantial share of the domestic market for their products.

3.3 Screening Potentially Promising Ideas

Once a list of project ideas has been put forward, the first step is to select one or more of them as
potentially promising. This, calls for a quick preliminary screening by experienced professionals
who could also modify some of the proposals. At this stage, the screening criteria are vague and
rough, that become specific and refined as project planning advances.

During the preliminary screening to eliminate ideas, which prima facie are not promising, it is
required to look into the aspects such as:

 Compatibility with the promoter

 Consistency with government priorities
 Availability of inputs
 Adequacy of market
 Reasonableness of costs
 Acceptability of risk level

During preliminary selection, the analyst should eliminate project proposals that:

 Are technically unsound and risky;

 Have no market for the output;
 Have inadequate supply of inputs;
 Are very costly in relation to benefits;
 Assume over-ambitious sales and profitability.
3.4 Approaches, aspects, and considerations in project identification

The following table presents the approaches, aspects, and considerations in project
identification studies:

APPROACHES ASPECTS CONSIDERATIONS

Area studies  Identification of opportunities in  backward/marginalized
given area as localities, regions, areas
states, etc
 To bring balanced development
Industry studies  Identification of opportunities in the  Development plans &
industrial sector programs
 Specific marketable product  Investment policy
 Diversification  Economic policy
 Import substitution
 Export possibilities
Resource based  Opportunities in exploiting natural  Industry policy
studies resources  Other policies & priorities
 natural resource analysis
 Import substitution
Sector analysis/  satisfaction of social needs:  Sectorial strategies
Studies Agricultural, manufacturing, health,  Sectorial priorities
education, etc  Existing unsatisfied needs
 Sectorial development level

3.5 Project Idea Generation Process

1. Survey & Review of Endowments and Facilities (infrastructure):

It involves surveying, reviewing and analysis of existing policies, resource endowments,
and socio-economic variables.
 Natural resource: review of the natural resource endowments of the country.
 Human resource : review of educational standard and facilities
 Socio-economic variables : review of various socio economic factors such as :
 Housing facilities & standard
 Utilities services
  health and nutrition services
 income distribution
2. Field survey and interview:
Asking people what goods or services they want in order to identify their unsatisfied
needs.
Asking people what their problems are.
Asking the public unit closest to the people at the grass-root level about what the
needs of the people in the community are.
3. Observing and analysis of prevailing situation:
 Observing and examining current demand & supply situation for goods/services
 Examining past& future trends for goods and services
 Observing possibilities for improvements/ quality & quantity
 Observing opportunities & threats in the invention & introduction of new technology,
etc.
4. Deliberations, discussions, and trainings:
o Discussions and deliberations in seminars, workshops, conferences both local and
international
o Meeting at different levels within the organization
o Educational & training programs
5. Brainstorming:

A group of people suggesting different ideas regarding future activities, very quickly,
before analyzing and/or considering the source of the idea more carefully.

6. Exposure to publication & media:

 Reading various publications and media: journals, magazines, newsletter,
newspapers, etc
 Audio-visual media (discussions, reports etc)
 Visual media (cinema, video)
7. Informal discussions and meetings:
 Get together meeting, Friendship meetings (fraternal associations)

3.6 Approaches to Project Idea Generation

Broadly speaking, project ideas could be generated through the following two approaches:

Top-Down Approach (Macro level)

It is an approach whereby individuals at the micro level, or grass root level, are not involved in
the process of project idea generation.

 Projects are identified at the higher planning (or macro) level and implemented at the
decision of officials at the top.
  It is based on the national plan and strategies.
 The government need not go down because the problem might be understandable.
 However, it may not relate to the existing reality in particular vicinity.
 Such projects may encounter resistance & implementation difficulties due to lack of
interest by the society.
 Such projects are implementation entities at given local area, which may not be consistent
with the needs in the context and hence, may not necessarily reflect the realities in the
locality.

Bottom-Up Approach (Micro level)

A bottom-up idea generation process requires base line surveys, which is based on the realities
existing in different localities.

Project Ideas

Survey of needs Survey of key Survey of resources

development problems

 May get community support, successfully implemented, and the potential benefits might
easily be visualized (seen) by the society. This may help to create goodwill and positive
images towards the institution.

3.7 Problems in Project Identification

 Ambiguity about the development objectives of the country:

 People may not clearly identify development goals
 development goal may not be well communicated
 may not be in the best interest of units or groups
 may not get full hearted acceptance from the public
 Priority issues in the existing development objectives:
 Conflict regarding the priorities set
 opposing views may result in lack of interest & commitment
 Differences in views regarding critical aspects of priority
 differences in prioritizing goals & objectives
 Limited information and data and obstacles in data/information flow and accessibility:
 Data and information flow problem
 accessibility of data flowing
  limited data& information
 data may not be dependable(reliable) to use
 Conflict of interest between local beneficiary group: (i.e. some groups may bear the cost
and others may get the benefit)
 What are the costs & benefits of identified projects?
 Who bears the costs & benefits in the society?
 Is benefits accruing to other groups while the costs paid by a given local group
(unit)
 Mechanisms to compensate those bearing the costs
 Unless compensated, the consequences might be unfavorable, costly, and
severe as well.
 CHAPTER FOUR
FINANCIAL ANALYSIS OF PROJECT
5.1. FINANCIAL COST-BENEFIT ANALYSIS
The analysis of financial costs and benefits is a key step in the project preparation process, which
seeks to ascertain whether the proposed project will be financially viable i.e. in the sense of
being able to meet the burden of servicing debt and whether the proposed project will satisfy the
returns/expectations of those who provide capital and/or the promoters.
Objectives of Financial cost-benefit analysis:
 To establish the project’s financial viability for the private investor
 Commercial profitability is the yardstick for selection among competing projects.
Components of financial analysis:
 Investment cost estimation
 Revenue estimation
 Production costs & expenses
 profitability analysis
 Cash flow estimation and analysis
 Financial ratio analysis
 Uncertainty/risk analysis
 Debt repayment schedule
Determining relevant cash Flows:
Elements of cash inflows and outflows of the project under consideration can be described as
follows:
Cash inflows: project cash inflows are expected to appear from the following sources:
 Sales of the products or services
 Sales of by products
 recovery of net working capital
 other miscellaneous sources

Cash outflows- the project will have the following major categories of cash outflows:
1. Initial investment costs: These are defined as the sum of fixed assets (fixed investment
costs plus pre-production expenditures) and net working capital. Expenditures for fixed
assets constitute the resources required for construction and equipping an investment
project.
 Investment costs = fixed capital + Net working capital
 Fixed capital = fixed investment + pre-production capital costs,
 Hence, investment costs = fixed investment + pre-production capital costs + Net working
capital
2. Production costs: Production costs include the following three main categories of
costs:
 Material costs (direct)
 Labor costs (direct)
 Factory overhead costs- represent indirect materials and parts, indirect labor and other
overhead costs such as depreciation of facilities and equipment etc.
5.2. INVESTMENT PROJECT APPRAISAL METHODS:
Once the above analysis is made, the next tasks are going directly to the project appraisal
techniques. Investment project appraisal methods are classified into two basic categories. These
are non-discounted cash flow methods and discounted cash flow methods.
A. NON-DISCOUNTED CASH FLOW METHODS:
I. PAYBACK PERIOD METHOD: The payback period is the number of years required
to return the original investment from the net cash flows (net operating income after taxes
plus depreciation). When deciding between two or more competing projects the usual
decision is to accept the one with the shortest payback.
The decision rules are:
 If payback < acceptable time limit, accept project
 If payback > acceptable time limit, reject project

Merits of payback as an investment appraisal technique:

 Simplicity
 Rapidly changing technology- If new plant is likely to be scrapped in a shorter period
because of obsolescence, a quick payback is essential.
 Improving investment conditions-when investment conditions are expected to improve in
the near future, attention is directed to those projects which will release funds soonest, to
take advantage of the improved climate.
 Payback favors projects with a quick return.
Demerits of payback as an investment appraisal technique:
 Project return may be ignored
 Timing is ignored
 Lack of objectivity
 Project profitability is ignored
Advantages of using ARR method:
 It is simple to calculate using accounting data
  Earnings of each year are included in calculating the profitability of the project.
Disadvantages of using ARR method:
 It is inconsistent with wealth maximization as the objective of the firm
 Since it uses the accounting data it includes the amount of accruals in calculating the
earnings “net profit”
 It is based on the familiar accrual accounting
 It ignores the time value of money
B. DISCOUNTED CASH FLOW METHODS:
I. NET PRESENT VALUE METHOD (NPV): It is the method of evaluating projects
that recognizes that the Birr received immediately is preferable to a Birr received at
some future date. It discounts the cash flows to take into account the time value of
money.It is known at Net PV because the costs are subtracted from the benefits
NPV = Present value of cash inflows – Present value of cash outflows

Decision Rule:
 If the NPV is positive, the project will be accepted;
 If negative, it should be rejected.
Problems with NPV are it is difficult to explain to non-finance people and solution is
in Birr amounts, not in percentage rates of return.
• Measuring a project’s net cash flows:
– Forecast expected net profit from project.
– Estimate net cash flows directly.

The standard NPV formula is given by:

n Ct
NPV = ∑ − C0
t=1 (1 + k )t

Example
– Investment of $9000.
– Net cash flows of $5090, $4500 and $4000 at the end of years 1, 2 and 3
respectively.
– Assume required rate of return is 10%
– What is the NPV of the project?
Solution
 Thus, using a discount rate of 10%, the project’s NPV = +$2351 > 0, and is therefore
acceptable.
II. PROFITABILITY INDEX: It is sometimes called Benefit Cost Ratio or Present
value index. It is calculated by taking the present value of cash inflows divided by the
present value of cash outflows.
The decision criteria
Accept project with profitability Index (PI) greater than one. Using this criterion,
projects will be ranked from the one with highest PI down to one with the lowest, and
then project would be selected in the order of ranking up to the point where the
budget is exhausted.
Formula

5.3. PROJECT FINANCING

There are two types of project financing: equity and debt financing. When looking for money,
you must consider your company’s debt-to-equity ratio. The relation between amounts borrowed
and amounts invested to the business by the owners. The more money owners have invested in
their business, the easier it is to attract financing.
The proportion of debt to equity depends on how well the financial market is organized and the
availability of debt financing. In addition, the existence of capital markets and the legal
environment governing it will have a critical impact. However, shortage of financial resources
will be a critical constraint of implementing feasible investment projects.
Equity Financing:
Most small or growth-stage businesses use limited equity financing. As with debt financing,
additional equity often comes from non-professional investors such as friends, relatives,
employees, customers, or industry colleagues.
However, the most common source of professional equity funding comes from venture
capitalists. These are institutional risk takers and may be groups of wealthy individuals,
government-assisted sources, or major financial institutions. Most specialize in one or a few
closely related industries. Venture capitalists may scrutinize thousands of potential investments
annually, but only invest in a handful. The possibility of a public stock offering is critical to
venture capitalists. Quality management, a competitive or innovative advantage, and industry
growth are also major concerns.

Debt Financing:
There are many sources for debt financing: banks, savings and loans, commercial finance
companies, and the microfinance institutions. State and local governments have developed many
programs in recent years to encourage the growth of small businesses in recognition of their
positive effects on the economy.
Family members, friends, and former associates are all potential sources, especially when capital
requirements are smaller. Traditionally, banks have been the major source of small business
funding. Their principal role has been as a short-term lender offering demand loans, seasonal
lines of credit, and single-purpose loans for machinery and equipment.In addition to equity
considerations, lenders commonly require the borrower’s personal guarantees in case of default.
This ensures that the borrower has a sufficient personal interest at stake to give paramount
attention to the business. For most borrowers this is a burden, but also a necessity.
 CHAPTER FIVE
PROJECT MONITORING AND EVALUATION
6.1. Project Monitoring
The basis of project monitoring systems is to track actual progress against planned progress at
any given time. This covers financial progress (monitoring of actual expenditure against
budgeting expenditure) as well as the progress of project activities. Monitoring systems should
be considered alongside the implementation plan because it is the targets set out in this plan
which forms the targets for monitoring. The whole system is therefore often referred to as an
“integrated planning, implementation and monitoring system” (IPIMS).
Monitoring systems should:
 be concerned with future progress.
 Be simple and cost effective.
 Be able to detect deviationsquickly and accurately.
 Be verifiable.
When designing a monitoring system, the project formulation should keep the following points
in mind:
 Identify key personnel or informants for the monitoring information. These could
include line managers, accountants, contractors and suppliers etc.
 Indicate frequency of data/information collection time. Remember that data is only
effective once it has been processed.
 Identify responsibilities for data processing. Assign also responsibilities to act on the
result of these data.
 Try to attain the right combination of speed and accuracy. Sometimes a trade-off has
to be made between the two, with information that is extremely accurate leading to delays
in taking effective remedial action.
 Make sure that the monitoring system only intends to processes that data which is
necessary. Monitoring information increases workload so it is important that only the
most essential data is requested for processing.
Monitoring systems in themselves are ineffective unless they are linked to an effective
control system which will allow the manger to take swift and effective action to remedy
any deviations from the implementation plan.
Systems concerned with implementation measure the project’s effectiveness in
converting inputs to outputs; while monitoring systems concerned with operations
 measure the project’s effectiveness in converting outputs into immediate and wider
objectives.
Information acquired through monitoring systems can be divided into three categories:
 Monitoring of physical progress
 Monitoring of financial progress
 Monitoring the quality of project outputs.
6.2.1. Monitoring Physical Progress:
The primary purpose of physical progress monitoring is to ensure whether project activities are
on schedule. This can be achieved through milestone (target) monitoring and time chart
monitoring.
Milestone monitoring involves the use of project milestones which were identified as part of the
project implementation plan. The actual date on which these milestones were reached can be
entered in table form or on the Gantt chart. Milestone monitoring provides a retrospective record
of project progress, but it is unable to provide us with information about activities which are still
in progress.
Time chart monitoring is a method which is used to anticipate whether or not milestones will be
reached on schedule.
When dealing with physical progress of an activity there are three possible scenarios:
 Activity outputs can be quantifiedas a single number. This is relatively simple to
monitor. for example, if the activity was to print a certain number of textbooks then both
the physical target and progress to date can be expressed in terms of this single number
(for example, 250 books printed out of a target of 1000).
 Activity outputs can be measured and valued. This is the case with the construction of
buildings and roads. progress towards meeting physical targets should be expressed as:
When dealing with direct labor the planners must be careful not to equate the value of the
work done with financial spending. The planners should devise methods to measure
actual physical progress.
 Activity outputs cannot be directly valued. This is the case in activities such as training
or in supply-only contracts. These activities should use milestones to mark the beginning
and end of each separate activity phase. if this is not possible, physical progress can be
expressed as:
Time spent to date X 100(%)
Total time to complete
This can be problematic because the time taken may not bear any relation to the actual
amount of physical progress towards activity completion. Once physical progress has
 been monitored for all ongoing activities, it is possible to plot this information against the
implantation plan in the form of a bar chart.
6.2.2. Monitoring Financial Progress:
This involves comparing actual expenditure against the financial plan (budget) produced as
part of the implementation plan. The project must therefore have a cost reporting system in
place to enable a comparison of actual and predicted costs. It is unwise to rely on existing
accounting systems to provide this information as these systems are liable to be slow and to
categorize expenditure using different methods to those desired by the project manager.
As many authors note “public sector managers will need to take particular care that they keep a
measure of overall spending of the project against overall budget……managers are not able to
spend above each year’s authorized budget, so that cost over-runs are met by delaying
implementation, or reducing the scope of the project to compensate.”
Once the manager has access to accurate cost data, it is possible to utilize this information in the
process of project cost control. Using the following relationship can do this:.
6.2.3. Monitoring the Quality of Project Outputs:
This involves ensuring that outputs are delivered according to specification. This is normally
done through a system of direct inspection and supervision. A formal agreement between the
implementing agency and the project owner that project outputs are satisfactory is known as
‘signing-off’. Each project will have its own quality assurance features in operation and it is
important that the quality control aspect is not overlooked during project design.
6.3. Project Evaluation:
Evaluation is the structured process by which a project activities and achievements are assessed
and understood. It provides information for those who are involved in the project such as
managers, promoters, funders and/or policy makers. Evaluation in addition to quantitative
questions attempts to answer also qualitative questions. Evaluation could be ongoing (midterm),
terminal or ex post. A good evaluation system in a project from the outset may assist the project
implementers in identifying difficulties that hinder the progress as planned and avoid repeating
mistakes in future endeavors. It is therefore, crucial to identify the main actors for the evaluation
exercise during the project formulation.
The preliminary function of evaluation after project completion is to use data on the performance
of projects in such a way that new projects can learn from experience.
Project Sustainability:
A project is sustainable if its net benefits continue throughout the life of the project at a level
sufficient to meet the predetermined objectives. Sustainability is, therefore, the ability of a
project under consideration to continue operation or provision of services and/or production
without interruptions for the period under design. It also includes the managerial and technical
capacity and capability of the project personnel in the operation and running of the project to
meeting its desired objectives.
The aim of any development project is to meet its predetermined objectives/goals on sustainable
basis. If the project formulators fail to consider what will happen upon completion of the
project’s implementation phase, then however well implemented, the project is liable to
encounter serious problems in providing the required services and/or production.
Full coverage and exhaustive analysis of project aspects such as: demand/need, technical,
environmental, social, institutional, financial, and economic analyses are critical for the
sustainability of a project under consideration. Furthermore, risk, uncertainty and
distributional analysis are vital to ensure the sustainability of a project. Project planning,
therefore, should also need focus on project handover, operations, maintenance and termination
arrangements so that implementation and operation phases are smooth and clear.
To ensure that the transition between the project’s implementation and operation phase is as
smooth as possible consider the following strategies in the formulation of the proposed project:
 Ensure that project handover, operation and termination arrangements are properly
planned and responsibilities identified from the outset.
 Ensure that the handover operation and commissioning period is smooth in order to use
newly created facilities and utilities to use them in the most efficient and effective
manner.
 Ensure that project handover procedures have included acceptance tests, relevant safety
and quality standards set by the project or responsible authority.
 Ensure that the process of project operation is properly monitored and changes to be
achieved during operation are evaluated.
 Ensure that adequate maintenance facilities and operation arrangements are in place for
the proposed technology or system of operation.
 Ensure that the institutional and financial arrangements for project operations should be
clearly outlined at the project formulation stage.
 Ensure that adequate financial provision has been made for maintenance needs, which
may arise during operations.
 Examine thoroughly that financing arrangements for future operation, especially with
relation to the funding of recurrent costs.
 Ensure that the body responsible for project operations should have adequate
organizational capacity in order that it will be able to sustain operations.
 Ensure that proper management information system is in place with practically applicable
tools to successfully implement and operate a project.
 Ensure that the project’s technical design utilizes technology, which is easy to maintain
within the environment in which it will operate.
Summary of Project Analysis and Overall Decision Project Profile
Project Title: _________________________________________________
Project Code: ________________________________________________
Specific area where project will be implemented: ____________________
Sector within which a project will be implemented: __________________
Responsible Authority: ________________________________________
Scheduled Start Date: _________________________________________
Scheduled completion Date:____________________________________
Total Budget: ________________________________________________
Sources and Terms of Project Financing: __________________________
Summary of Project Analysis:
Issues of Project Preparation Good Satisfactory Unsatisfactory Comments
Technical aspect
Environmental aspect
Social aspect
Institutional aspect
Financial aspect
Economic aspect
Sensitivity analysis and Risk
Overall Decision:
Accept Reject Redesign Comment(action to be taken/by
whom)