Chapter Four: Project Financing

• The Concept of Project Finance

• A huge body of literature is available today on the subject
of structured finance in general and project in particular.
• The majority of authors agree on defining project finance
as financing that as a priority does not depend on the
soundness and credit worthiness of the sponsors, namely,
parties proposing the business idea to launch the project.
• Approval does not even depend on the value of assets
sponsors are willing to make available to financers as
collateral.
• Instead, it is basically a function of the project’s ability to
repay the debt contracted and remunerate capital
invested at a rate consistent with the degree of risk
inherent in the venture concerned.
• Project financing is an innovative and timely financing
technique that has been used on many high-profile
corporate projects.
• Employing a carefully engineered financing mix, it has long
been used to fund large-scale natural resource projects,
from pipelines and refineries to electric-generating
facilities and hydro-electric projects.
• Increasingly, project financing is emerging as the preferred
alternative to conventional methods of financing infrastructure
and other large-scale projects worldwide.
• Project financing discipline includes:
i. understanding the rationale for project financing,
ii. how to prepare the financial plan
iii. assess the risks
Iv. design the financing mix, and raise the funds.
• In addition, one must understand the cogent /well-argued
analyses of why some project financing plans have succeeded
while others have failed.
• A knowledge-base is required financing
• issues for the host government legislative provisions
• public/private infrastructure partnerships,
• public/private financing structures;
• credit requirements of lenders, and how to determine
the project's borrowing capacity;
• how to prepare cash flow projections and use them to
measure expected rates of return;
• tax and accounting considerations; and analytical
techniques to validate the project's feasibility.
• Project finance is finance for a particular project, such as a
mine, toll road, railway, pipeline, power station, ship, hospital
or prison, which is repaid from the cash-flow of that project.
• Project finance is different from traditional forms of finance
because the financier principally looks to the assets and
revenue of the project in order to secure and service the
loan.
• In contrast to an ordinary borrowing situation, in a project
financing the financier usually has little or no recourse to the
non-project assets of the borrower or the sponsors of the
project.
• In this situation, the credit risk associated with
the borrower is not as important as in an
ordinary loan transaction;
• what is most important is the identification,
analysis, allocation and management of every
risk associated with the project.
• Project finance is a method of raising long-term
debt financing for major projects through
“financial engineering,” based on lending against
the cash flow generated by the project alone;
• it depends on a detailed evaluation of a project’s
construction, operating and revenue risks, and
their allocation between investors, lenders, and
other parties through contractual and other
arrangements.
• It is a technique that has been used to raise huge amounts of
capital and promises to continue to do so, in both developed
and developing countries, for the foreseeable future.
• Project finance is generally used to refer to a non-recourse
or limited recourse financing structure in which debt, equity
and credit enhancement are combined for the construction
and operation,
• or the refinancing, of a particular facility in a capital-
intensive industry.
• Project finance is a relatively new financial discipline that has
developed rapidly over the last 20 years.
 Development of Project Finance
• The growth of project finance over the last 20
years has been driven mainly by the worldwide
process of deregulation of utilities and
privatization of public-sector capital investment.
• This has taken place both in the developed
world as well as developing countries.
• It has also been promoted by the
internationalization of investment in major
projects:
• leading project developers now run worldwide
portfolios and are able to apply the lessons
learned from one country to projects in
another, as are their banks and financial
advisers.
• Governments and the public sector generally
also benefit from these exchanges of
experience.
 Features of project finance
• Project finance structures differ between
these various industry sectors and from deal
to deal:
• there is no such thing as “standard” project
finance, since each deal has its own unique
characteristics.
• But there are common principles underlying
the project finance approach.
 Some typical characteristics of project
finance are:
a. It is provided for a “ring fenced” project (i.e., one which
is legally and economically self-contained) through a
special purpose legal entity (usually a company) whose
only business is the project (the “Project Company”).
b. It is usually raised for a new project rather than an
established business (although project finance loans
may be refinanced).
c. There is a high ratio of debt to equity (“leverage” or
“gearing”)—roughly speaking, project finance debt may
cover 70 –90% of the cost of a project.
d. There are no guarantees from the investors in the Project
Company (“nonrecourse” finance), or only limited guarantees
(“limited-recourse” finance), for the project finance debt.
e. Lenders rely on the future cash flow projected to be generated
by the project for interest and debt repayment (debt service),
rather than the value of its assets or analysis of historical
financial results.
f. The main security for lenders is the project company’s contracts,
licenses, or ownership of rights to natural resources; the project
company’s physical assets are likely to be worth much less than
the debt if they are sold off after a default on the financing.
g. The project has a finite life, based on such
factors as the length of the contracts or
licenses or the reserves of natural resources,
and therefore the project finance debt must
be fully repaid by the end of this life.
• Hence, project finance differs from a
corporate loan, which is primarily lent against
a company’s balance sheet and projections
extrapolating from its past cash flow and profit
record, and assumes that the company will
remain in business for an indefinite period and
so can keep renewing (“rolling over”) its loans.
• Project finance is made up of a number of
building blocks, although all of these are not
found in every project finance transaction, and
there are likely to be ancillary contracts or
agreements.
• The project finance itself has two elements:
1. Equity, provided by investors in the project
2. Project finance-based debt, provided by one or
more groups of lenders
 Principal Advantages and Disadvantages of
Project Financing
• Benefits of Project Finance to Investors
• Investors use project finance for the following variety of
reasons:
A. Non-Recourse
• The typical project financing involves a loan to enable the
sponsor to construct a project where the loan is completely
"non-recourse" to the sponsor, i.e., the sponsor has no
obligation to make payments on the project loan if
revenues generated by the project are insufficient to cover
the principal and interest payments on the loan.
• In order to minimize the risks associated with
a non-recourse loan, a lender typically will
require indirect credit supports in the form of
guarantees, warranties and other
covenants/agreements from the sponsor, its
affiliates and other third parties involved with
the project.
 b. High Leverage
• One major reason for using project finance is
that investments in ventures such as power
generation or road building have to be long
term but do not offer an inherently high
return: high leverage improves the return for
an investor.
• Project finance thus takes advantage of the fact
that debt is cheaper than equity, because
lenders are willing to accept a lower return (for
their lower risk) than an equity investor.
• Naturally the investor needs to be sure that the
investment in the project is not jeopardized by
loading it with debt, and therefore has to go
through a sound due diligence process to
ensure that the financial structure is prudent.
• Of course the argument could be turned the
other way around to say that if a project has
high leverage it has an inherently higher risk,
and so it should produce a higher return for
investors.
• But in project finance higher leverage can only
be achieved where the level of risk in the
project is limited.
 c. Tax Benefits
• A further factor that may make high leverage more
attractive is that interest is tax deductible, whereas
dividends to shareholders are not, which makes debt even
cheaper than equity, and hence encourages high leverage.
• In major projects there is, however, likely to be a high
level of tax deductions anyway during the early stages of
the project because the capital cost is depreciated against
tax, so the ability to make a further deduction of interest
against tax at the same time may not be significant.
 d. Off-balance-sheet financing
• If the investor has to raise the debt and then
inject it into the project, this will clearly appear
on the investor’s balance sheet.
• A project finance structure may allow the
investor to keep the debt off the consolidated
balance sheet, but usually only if the investor
is a minority shareholder in the project—which
may be achieved if the project is owned
through a joint venture.
• Keeping debt off the balance sheet is sometimes seen as
beneficial to a company’s position in the financial markets,
• but a company’s shareholders and lenders should normally
take account of risks involved in any off-balance-sheet
activities, which are generally revealed in notes to the
published accounts even if they are not included in the
balance sheet figures;
• so although joint ventures often raise project finance for
other reasons (discussed below), project finance should
not usually be undertaken purely to keep debt off the
investors’ balance sheets.
 e. Borrowing Capacity
• Project finance increases the level of debt that
can be borrowed against a project: nonrecourse
finance raised by the Project Company is not
normally counted against corporate credit lines
(therefore in this sense it may be off-balance
sheet).
• It may thus increase an investor’s overall
borrowing capacity, and hence the ability to
undertake several major projects simultaneously.
 f. Risk Limitation
• An investor in a project raising funds through
project finance does not normally guarantee
the repayment of the debt—the risk is
therefore limited to the amount of the equity
investment.
• A company’s credit rating is also less likely to
be downgraded if its risks on project
investments are limited through a project
finance structure.
g. Risk Spreading / Joint Ventures
• A project may be too large for one investor to
undertake, so others may be brought in to
share the risk in a joint-venture Project
Company.
• This both enables the risk to be spread
between investors and limits the amount of
each investor’s risk because of the
nonrecourse nature of the Project Company’s
debt financing.
• As project development can involve major
expenditure, with a significant risk of having to
write it all off if the project does not go ahead
(cf. §4.2),
• a project developer may also bring in a
partner in the development phase of the
project to share this risk.
• This approach can also be used to bring in
“limited partners” to the project (e.g., by
giving a share in the equity of a Project
Company to an Off taker who is thus induced
to sign a long-term Off take Contract, without
being required to make any cash investment,
or with the investment limited to a small
proportion of the equity.)
• Creating a joint venture also enables project
risks to be reduced by combining expertise
(e.g., local expertise plus technical expertise;
construction expertise plus operating expertise;
operating expertise plus marketing expertise).
• In such cases the relevant Project Contracts
(e.g., the EPC Contract or the O&M Contract)
are usually allocated to the partner with the
relevant expertise.
 h. Long-Term Finance
• Project finance loans typically have a longer term
than corporate finance.
• Long-term financing is necessary if the assets
financed normally have a high capital cost that
cannot be recovered over a short term without
pushing up the cost that must be charged for the
project’s end product.
• So loans for power projects often run for nearly 20
years, and for infrastructure projects even longer.
• (Oil, gas, and minerals projects usually have a
shorter term because the reserves extracted
deplete more quickly and
• telecommunication projects also have a
shorter term because the technology involved
has a relatively short life.)
 i. Enhanced Credit
• If the Off taker has a better credit standing
than the equity investor, this may enable debt
to be raised for the project on better terms
than the investor would be able to obtain
from a corporate loan.
 j. Unequal Partnerships
• Projects are often put together by a developer
with an idea but little money, who then has to
find investors.
• A project finance structure, which requires less
equity, makes it easier for the weaker
developer to maintain an equal partnership,
because if the absolute level of the equity in
the project is low, the required investment
from the weaker partner is also low.
 The Benefits of Project Finance to Third
Parties
• Equally, there are benefits for the off taker or end
user of the product or service provided by the
Project Company, and also for the government of the
country where the project is located:
a. Lower Product or Service Cost
• In order to pay the lowest price for the project’s
product or service, the Off taker or end user will
want the project to raise as high a level of debt as
possible, and so a project finance structure is
beneficial.
• This can be illustrated by doing the calculation in Table 2.2
in reverse:
• suppose the investor in the project requires a return of at
least 15%, then, as Table 2.3 shows, to produce this,
revenue of 120 is required using low leverage finance, but
only 86 using high leverage project finance, and hence the
cost to the Off taker or end user reduces accordingly.
• (In finance theory, an equity investor in a company with
high leverage would expect a higher return than one in a
company with low leverage, on the ground that high
leverage equals high risk).
• However, as discussed above, this effect cannot be
seen in project finance investment, since its high
leverage does not imply high risk.)
• (Also cf. §13.1 for other issues affecting leverage.)
• So if the Off taker or end user wishes to fix the lowest
long-term purchase cost for the product of the project
and is able to influence how the project is financed,
• the use of project finance should be encouraged, e.g.,
by agreeing to sign a Project Agreement that fits
project finance requirements.
 b. Additional Investment in Public
Infrastructure
• Project finance can provide funding for
additional investment in infrastructure that
the public sector might otherwise not be able
to undertake because of economic or financial
constraints on the public-sector investment
budget.
• Of course, if the public sector pays for the project
through a long-term Project Agreement,
• it could be said that a project financed in this way
is merely off-balance sheet financing for the
public-sector, and should therefore be included in
the public-sector budget anyway.
• Whether this argument is a valid one depends on
the extent to which the public sector has
transformed real project risk to the private sector.
 c. Risk Transfer
• A project finance contract structure transfers
risks of, for example, project cost overruns
from the public to the private sector.
• It also usually provides for payments only
when specific performance objectives are
met, hence also transferring to the private
sector the risk that these are not met.
 c. Lower Project Cost
• Private finance is now widely used for projects that
would previously have been built and operated by
the public sector.
• Apart from relieving public sector budget pressures,
such PPP projects also have merit because the
private sector can often build and run such
investments more cost-effectively than the public
sector, even after allowing for the higher cost of
project finance compared to public-sector finance.
• This lower cost is a function of:
• The general tendency of the public sector to
“overengineer” or “gold plate” projects
• Greater private-sector expertise in control and
management of project construction and
operation (based on the private sector being
better able to offer incentives to good managers)
• The private sector taking the primary risk of
construction and operation cost overruns, for
which public-sector projects are notorious
• “Whole life” management of long-term
maintenance of the project, rather than ad hoc
/public notice arrangements for maintenance
dependent on the availability of further public-
sector funding.
• However, this cost benefit can be eroded by “deal
creep” (i.e., increases in costs during detailed
negotiations on terms or when the specifications
for the project are changed during this period.
 d. Third-Party Due Diligence
• The public sector may benefit from the
independent due diligence and control of the
project exercised by the lenders, who will
want to ensure that all obligations under the
Project Agreement are clearly fulfilled and
that other Project Contracts adequately deal
with risk issues.
 f. Transparency
• As a project financing is self-contained (i.e., it deals
only with the assets and liabilities, costs, and
revenues of the particular project), the true costs
of the product or service can more easily be
measured and monitored.
• Also, if the Sponsor is in a regulated business (e.g.,
power distribution, the unregulated business can
be shown to be financed separately and on an
arm’s-length basis via a project finance structure.
 g. Additional Inward Investment
• For a developing country, project finance
opens up new opportunities for infrastructure
investment, as it can be used to create inward
investment that would not otherwise occur.
• Furthermore, successful project finance for a
major project, such as a power station, can act
as a showcase /platform to promote further
investment in the wider economy.
 g. Technology Transfer
• For developing countries, project finance
provides a way of producing market-based
investment in infrastructure for which the
local economy may have neither the resources
nor the skills.
 Disadvantages of Project Finance
a. Complexity of risk allocation
• Project financings are complex transactions
involving many participants with diverse
interests.
• This results in conflicts of interest on risk
allocation amongst the participants and
protracted negotiations and increased costs to
compensate third parties for accepting risks.
b. Increased Lender Risk
• Since banks are not equity risk takers, the
means available to enhance the credit risk to
acceptable levels are limited, which results in
higher prices.
• This also necessitates expensive processes of
due diligence conducted by lawyers, engineers
and other specialized consultants.
c. Higher Interest Rates and Fees
• Interest rates on project financings may be
higher than on direct loans made to the
project sponsor since the transaction structure
is complex and the loan documentation
lengthy.
• Project finance is generally more expensive
than classic lending because of:
• The time spent by lenders, technical experts and
lawyers to evaluate the project and draft complex loan
documentation;
• The increased insurance cover, particularly political
risk cover;
• The costs of hiring technical experts to monitor the
progress of the project and compliance with loan
covenant;
• The charges made by the lenders and other parties for
assuming additional risks.
d. Lender Supervision
• In order to protect themselves, lenders will want to closely
supervise the management and operations of the project (whilst
at the same time avoiding any liability associated with excessive
interference in the project).
• This supervision includes site visits by lender’s engineers and
consultants, construction reviews, and monitoring construction
progress and technical performance, as well as financial
covenants to ensure funds are not diverted from the project.
• This lender supervision is to ensure that the project proceeds as
planned, since the main value of the project is cash flow via
successful operation.
e. Lender Reporting Requirements
• Lenders will require that the project company
provides a steady stream of financial and technical
information to enable them to monitor the
project’s progress.
• Such reporting includes financial statements,
interim statements, reports on technical progress,
delays and the corrective measures adopted, and
various notices such as events of default.
f. Increased Insurance Coverage
• The non-recourse nature of project finance
means that risks need to be mitigated.
• Some of this risk can be mitigated via insurance
available at commercially acceptable rates.
• This however can greatly increase costs, which
in itself, raises other risk issues such as pricing
and successful syndication.
g. Transaction Costs May Outweigh the Benefits
• The complexity of the project financing arrangement
can result in a transaction whose costs are so great
as to offset the advantages of the project financing
structure.
• The time-consuming nature of negotiations amongst
various parties and government bodies, restrictive
covenants, and limited control of project assets, and
burgeoning legal costs may all work together to
render the transaction unfeasible.
 Common Misconceptions about Project
Finance
• There are several misconceptions about project
finance:
• The assumption that lenders should in all
circumstances look to the project as the exclusive
source of debt service and repayment is
excessively rigid and can create difficulties when
negotiating between the projects participants.
• Lenders do not require a high level of equity
from the project sponsors.
• The assets of the project provide 100% security.
• The project’s technical and economic
performance will be measured according to pre-
set tests and targets.
• Lenders will not want to abandon the project as
long as some surplus cash flow is being generated
over operating costs, even if this level represents
an uneconomic return to the project sponsors.
• Lenders will often seek assurances from the
host government about the risks of
expropriation and availability of foreign
exchange.
• Often these risks are covered by insurance or
export credit guarantee support.
 CHAPTER FIVE: PROJECT IMPLEMENTATION

• 5.1 The Concept and Purpose of Project Implementation

• This is the crucial stage of any project since the objective of
the earlier effort in the stages above was to have projects to
be undertaken.
• The implementation period usually has three phases: the
investment period, the development period, and full
development.
• This forms the life of the project.
• The investment period refers to when the major project
investments are undertaken and could take one to three
years, depending on the nature of the project.
 5.2 Problems in Project Implementation
• There are enormous problems in project implementation.
• Particularly in developing countries like ours, the nature
and degree of problems varies from sector to sector, from
project to project, from region to region, and from area to
area.
• However, for the convenience of discussion, the
commonly encountered project implementation problems
are divided in to four categories.
• These are financial, managerial and institutional, technical
and political.
 1. Financial Problems:
• Financial difficulties occur frequently during project
implementation.
• Inadequate allocation of budgetary funds,
• shortage of foreign exchanges ( for projects constitute
foreign components),
• delay in budget releases,
• general price and salary increases,
• change in tariff and interest rates, and
• losses due to fluctuations in foreign exchange rates are
the most common causes of financial problems:
 The effects of financial difficulties on
implementation are:
• Delay /interruption of project activities
• Cost increase ( over - run)
• Reduction in the scope of the project
• In our country what is usually observed is a mismatch
between the investment programs prepared and the
financial resources available to implement them.
• When this happens, the flow of funds for project
finance will frequently interrupted and project activities
are postponed from one budgetary year to the
subsequent one.
• In some cases even when funds are available
there is a chronic delay by responsible
government agencies in paying their bills for
various reasons.
• This again results with implementation delays.
• A vicious circle is then started.
 2. Management Problems:
• This encompasses what are usually considered institutional
problems.
• Managerial problems can be manifested:
a. In the top government administration,
b. In the regional or local levels, and
c. In the upper or middle management of the project and/or
implementing agencies.
• An ill defined organizational set -up, low salaries and poor
staffing policies:
• lack of coordination among various agencies that influence the
project implementation, and
• discontinuity of management as a result of changes for
political and other reasons, etc, are some features of
management problems.
• Weak management and institutional capacity is a reflection of
lack of skilled manpower,
• inadequate monitoring and evaluation system,
• inadequate project coordination and lack of information
system.
• These managerial and institutional problems are often the
root cause of implementation delays and cost over - runs.
 3. Technical Problems:
• In many cases technical problems result from the poor
estimates and projections on the project activities and
characters during the preparation stage.
• For example, in engineering area such problems as difficult
soil conditions, poor quality of materials, technical defects
in design, mistakes in installation and start- up of
equipment, unsuitability of imported equipment for local
conditions, etc,
• And in agriculture, inadequate technical packages,
inadequate awareness of the beneficiary farmers, etc are
some of the frequently observed problems.
 4. Political Problems:
• When government (at all levels) commitment is
absent, weak or changing, obviously project
implementation suffers.
• A rapid rotation of political appointees in some areas
considerably influences success in project
implementation.
• Project management has to take in to account the
potential impact of such political and administrative
factors, anticipate the problems in so far as possible,
and modify the implementation path accordingly.
 5. Other Problems:
• Donor conditionality,
• lengthy project approval and fund
disbursement procedures of donors (financing
agencies),
• low community involvements in project
planning and implementation, etc., are the
other contributing factors in delay of
implementation.
 5.3 Pre-Requisites for Successful Project
Implementation
• A successful project implementation means
that the project has been completed on time,
at or reasonably close to the original cost
estimates, and with the expected benefits
realized or even exceeded.
• The following are some of the principal factors
that could account for successful projects and
then those that lead to problems and
difficulties during implementation.
 1. Adequate Formulation
• Often project formulation is deficient because of one or more of
the following shortcomings. These include:
• Superficial field investigation;
• hasty assessment of input requirements;
• careless methods used for estimating costs and benefits;
• omission of project linkages;
• flawed judgments because of lack of experience and expertise;
• undue hurry to get started;
• deliberate over-estimation of benefits and under-estimation of cost
• Care must be taken to avoid the above deficiencies so that the
appraisal and formulation of the project is thorough, adequate,
and meaningful.
 2. Political Commitment:
• Strong and sustained commitment by all levels of the
government body (national, regional, zonal, wereda,
and kebele) to the project's objectives is the first and
probably most important reason for success.
• Political or government commitment-through
allocation of human, financial and other resources or
administrative and political apparatus.
• It is strongly advisable that stakeholders' participation
and consultation during project preparation would
help to ensure commitments
 3. Simplicity of Design:
• Selection of proper project design is central to successful
project implementation.
• Projects with relatively simple and well - defined objectives
and based on proven and appropriate technologies or
approaches have a better chance of being implemented
successfully.
• The major success factors in some rural development
programs and projects appear to have been the
appropriateness of the technologies proposed for the
specific local conditions, the complement of recommended
inputs, and the strength of the support systems, etc.
 4. Careful Preparation:
• Project must be sufficiently prepared before it started.
• Careful preparation includes not only matters such as detailed
engineering and land acquisition but also other technological
packages, socio - economic factors, environmental issues,
organizational and institutional arrangements, and other
supporting services.
• For a big project, like that of rural development, pilot project is
sometimes important to test proposed activities and approaches
under local conditions.
• This would not only improve success in implementation but also
help to save both time and money that might be unnecessarily
spent.
 5. Good Management:
• The influence of the quality of management on project
implementation performance is usually visible.
• Many projects in serious difficulty during implementation
have been turned around by the appointment of a competent
manager.
• What are the qualities of good manager and management?
• Superior performance in managerial job is associated with
performing satisfactorily key areas' of the job.
• A key area can be defined as a major component of a
managerial job of such importance that its failure to perform
satisfactorily will endanger the whole job.
 6. Advance Action:
• When the project appears prima face to viable and desirable,
advance action on the following activities may be initiated:
a. acquisition of land,
b. securing essential clearances,
c. identifying technical collaborators/consultants,
d. arranging for infrastructure facilities,
e. preliminary design and engineering, and
f. Calling of tenders.
• To initiate advance action with respect to the above activities,
some investment is required.
• Clearly, if the project is not finally approved,
this investment would represent an
anfractuous outlay.
• However, the substantial saving (in time and
cost) that are expected to occur, should the
project be approved (a very likely event, given
the prima facie desirability of the project)
often amply the incurrence of such costs
 7. Timely Availability of Funds:
• Once a project is approved, adequate funds
must be made available to meet its
requirements as per the plan of
implementation-
• it would be highly desirable if funds are
provided even before the final approval to
initiate advance action.
 8. Judicious Equipment Tendering and
Procurement.
• To minimize time over-runs, it may appear that
a turnkey contract has obvious advantages.
• Since these contracts are likely to be bagged by
foreign suppliers, when global tenders are
floated, a very important question arises.
• How much should we rely on foreign suppliers
and how much should we depend on
indigenous suppliers?
• Over- dependence on foreign suppliers, even though
seemingly advantageous from the point of view of time and
cost, may mean considerable outflow of foreign exchange
and inadequate incentive for the development of
indigenous technology and capability.
• Over-reliance on indigenous suppliers may mean delays and
higher uncertainty about the technical performance of the
project.
• A judicious balance must be sought which moderates the
outflow of foreign exchange and provides reasonable
stimulus to the development of indigenous technology.
• In any case, the number of contract packages should be kept
to a minimum in order to ensure effective coordination.
 9. Better Contract Management:
• In this context, the following should be done:
• The competence and capability of all the contractors must be ensured-
one weak link can jeopardize the timely performance of the contract
• Proper discipline must be inculcated among contractors and suppliers by
insisting that they should develop realistic and detailed resources and
time plans which are congruent with the project plan.
• Penalties-which may be graduated- must be imposed for failure to meet
contractual obligations. Likewise, incentives may be offered for good
performance.
• Help should be extended to contractors and suppliers when they have
genuine problems-they should be regarded as partners in a common
pursuit.
• Project authorities must retain latitude to off-load contracts (partially or
wholly) to other parties well in time where delays are anticipated.
 10. Effective Monitoring:
• In order to keep a tab on the progress of the
project, a system of monitoring must be
established. This helps in:
• Anticipating deviations from the
implementation plan.
• Analyzing emerging problems.
• Taking corrective action.
• In developing a system of monitoring, the following
points must be borne in mind:
– It should focus sharply on the critical aspects of project
implementation.
– It must lay more emphasis on physical milestones and not
on financial targets.
– It must be kept relatively simple. If made over-
complicated, it may lead to redundant paper work and
diversion of resources. Even worse, monitoring may be
viewed as an end in itself rather than as a means to
implement the project successfully.
 11. Other Factors:
• In addition to the above list, the followings are the
other contributing factors for project
implementation success:
• Well defined goals and objectives,
• Agreement over goals and objectives among the
participants in the project
• Detailed work break - down structure and
commitment to achieving goals and objectives, and
• Reliable monitoring and tracking techniques, etc.
 CHAPTER SIX: PROJECT MONITORING &
EVALUATION
• 6.1The Concept of Monitoring and Evaluation
• Monitoring can be defined as a continuous assessment of
both the functioning of the project activities in the context
of implementation schedules and the use of project inputs
by targeted populations in the context of designed
expectations.
• This should be an on-going activity during implementation.
• Monitoring can be carried out by the beneficiaries, the
managing staff, supervisory staff and the project
management staff.
• The aim should be to ensure that the activities of the project are
being undertaken on schedule to facilitate implementation as
specified in the project design.
• Any constraints in implementing the design can quickly be
detected and corrective action taken.
• Key questions in project monitoring include:
– Are the right inputs being supplied/delivered at the right time?
– Are the planned inputs producing the planned outputs?
– Are the outputs leading to the achievement of the planned objectives?
– Is the policy environment consistent with the design assumptions?
– Are the project objectives still valid?
• Monitoring is an internal project activity, an essential
part of good management practice, and, therefore, an
integral part of the day-to-day management.
• The term has a close meaning with control and
supervision.
• Evaluation, on the other hand, can be defined as a
periodic assessment of the relevance, efficiency,
effectiveness, impact, economic and financial viability,
and sustainability of a project in the context of its
stated objectives.
• The purpose of evaluation is to review the achievements
of a project against planned expectations, and to use
experience from the project to improve the design of
future projects and programs.
• Evaluation draws on routine reports produced during
implementation and may include additional investigations
by external monitors or by specially constituted missions.
• This implies that evaluation is a continuous exercise
during the project life and is much related to project
monitoring.
• Monitoring provides the data on which the evaluation is
based. However, formalized evaluation is undertaken at
specified periods.
• There is usually a mid-term and a terminal evaluation.
• Evaluation can also be undertaken when the project is in
trouble as the first step in a re-planning effort.
• Careful evaluation is also undertaken before any follow-up
project.
• Evaluation can be done internally or by external reviewers.
Some organizations have monitoring and evaluation units.
• Such a unit can provide project management with useful
information to ensure efficient implementation of projects,
• especially if it operates independently and objectively,
• because what the unit needs is to judge projects on the basis
of objectives, original project design and the reality on the
ground (the operating physical and policy environment).
• With no free hand, the feedback mechanism will be stifled
and information be “held-back” instead of being “fed-back”.
• The aim of evaluation is largely to determine the extent to
which the objectives are being realized.
• Evaluation, an essential ingredient of project management, is
concerned with the following critical questions:
• Are or have objectives being/been met? If not, were the objectives
realistic?
• Was the technology proposed appropriate?
• Was the institutional, management arrangements suited to the
conditions?
• Were the financial aspects carefully worked out?
• Were the economic aspects carefully explored?
• Did management quickly respond to changes?
• Was its response carefully considered and appropriate?
• How could the project’s structure be changed to make it more flexible?
6.2 Common Problems with Monitoring and
Evaluation
• There are several limiting factors for successful
monitoring and evaluation of development
projects.
• In the Ethiopian case, the following are the
most important frequently mentioned
problems:
• Insufficient awareness of the purpose of monitoring and evaluation
and inadequate attention paid to project implementation.
• Monitoring and evaluation activities are not seen as distinct
responsibility in their own and not given proper consideration.
• People rather feel monitoring and evaluation as faultfinding mission
and limit their cooperation for the activity.
• Inadequate or lack of monitoring and evaluation unit and staff both
at the project level and higher implementing body.
• In most cases, monitoring and evaluation system is not either
properly established or not provided with adequate attention and
resources where it exists.
• Poor accountability for failures and inadequate reward for special
efforts made towards successful project implementation.
• Limited training opportunity for monitoring and evaluation personnel
in projects or offices where the unit exists.
• Limited information source on project progress.
• Even information is available; it doesn’t answer the right questions.
• Frequently where the system exists it focus only on quantitative
financial aspects and physical implementation of the program/project.
• Late arrival of information required for monitoring.
• Too costly to collect information.
• Disregard of previous monitoring and evaluation findings in the design
of new projects.
• High mobility of project staff disrupting continuity of monitoring and
evaluation functions.
CHAPTER 7: PROJECT PROPOSAL WRITING
• Overview
• A project proposal is a detailed description of a series of activities
aimed at solving a certain problem.
• A technical proposal, often called a "Statement of Work,” is a persuasive
document.
• Its objectives are to:
• Identify what work is to be done
• Explain why this work needs to be done
• Persuade the reader that the proposers (you) are qualified for the work,
• have a plausible management plan and technical approach, and have
the resources needed to complete the task within the stated time and
cost constraints.
• The project proposal should be a detailed and
directed manifestation of the project design.
• It is a means of presenting the project to the
outside world in a format that is immediately
recognized and accepted.
• There are critical issues that must be examined in
advance of the actual preparation of project
proposal.
• These include:
• Interview past and prospective beneficiaries
• Though feedback was likely received when the previous project
ended, new benefits and conditions may have arisen since that
time.
• Speak to prospective beneficiaries to ensure that what you are
planning to offer is desired and needed.
• Review past project proposals.
• Avoid repeating mistakes and offering to reproduce results that have
already been achieved.
• Donors will be unlikely to provide more funding for something that
should already have been done.
• Review past project evaluation reports
• Organize focus groups
• Make sure that the people you need are willing and able to
contribute.
• Check statistical data
• Don’t let others discover gaps and inaccuracies in the data you are
relying on.
• Consult experts
• Outside opinions will give you ideas and credibility.
• Conduct surveys, etc. Gather as much preliminary information as
possible to demonstrate commitment to the project and to refine
the objectives.
• Hold community meetings or forums
 How to Write a Project Proposal

• Once the groundwork has been completed,

proposal writing can begin.
• The key decision to be made at this stage is
the structure of the project proposal
(including the content and length).
• The structure is determined by the nature of
the project as well as by the funding agency’s
requirements.
• Project Proposal Format
• There is no single fixed and universally accepted structure
for the development of a project proposal.
• General guideline within which one can make an adjustment
depending on the overall context of the problem under
consideration and situational factors that directly or
indirectly can affect implementation of the project.
• Accordingly, an ideal project must involve the following
elements.
• These include:
 1. Title Page
• A title page should appear on proposals longer than three to four
pages.
• The title page should indicate:
• The project title in initial capital letters
• The name of the lead organization (and potential partners, if any),
• Team name and individual member names
• Date
• An appropriate picture of the product, a team logo, or both
• The project title should be short, concise, and preferably refer to a
certain key project result or the leading project activity.
• Project titles that are too long or too general fail to give the reader
an effective snapshot of what is inside.
 Contents Page
• If the total project proposal is longer than 10
pages it is helpful to include a table of
contents at the start or end of the document.
• The contents page enables readers to quickly
find relevant parts of the document.
• It should contain the title and beginning page
number of each section of the proposal.
 Abstract/ Executive Summary
• Abstract which sometimes is also called Executive Summary is a brief
summary of the proposal.
• Many readers lack the time needed to read the whole project proposal.
• It is therefore useful to insert a short project summary-an abstract.
• For this reason, an Abstract/ Executive Summary should summarize the
proposal so that a reviewer knows what to expect when reading the rest of
it.
• It also should be helpful for any others who may not be reviewers, but
need to understand and approve the general concept of the proposed
research.
• This summary should not include information not explained in greater
detail later in the proposal.
• The abstract should include:
• The problem statement;
• The project’s objectives;
• Implementing organizations;
• Key project activities; and
• The total project budget.
• For a small project the abstract may not be longer
than 10 lines.
• Bigger projects often provide abstracts as long as
two pages.
 Project Background/Context
• This part of the project describes the social, economic,
political and cultural background from which the project is
initiated.
• It should contain relevant data from research carried out in
the project planning phase or collected from other sources.
• The writer should take into consideration the need for a
balance between the length of this item and the size of the
overall project proposal.
• Large amounts of relevant data should be placed in an
annex.
 Project Rationale/Project Justification

• At this stage it is important to clarify why this

particular project is needed, as opposed to all
the other possible projects that might be
proposed to address the same problem.
• Due to its importance usually this section is
divided into four or more sub-sections.
• These include:
 5.1. Problem Statement
• The problem statement provides a description of the
specific problem(s) the project is trying to solve, in
order to “make a case” for the project.
• Furthermore, the project proposal should point out
why a certain issue is a problem for the community
or society as a whole, i.e. what negative implications
affect the target group.
• There should also be an explanation of the needs of
the target group that appear as a direct consequence
of the described problem.
 – Priority Needs
• The needs of the target group that have arisen as a
direct negative impact of the problem should be
prioritized.
• An explanation as to how this decision was reached
(i.e. what criterion was used) must also be included.
-The Proposed Approach (Type of Intervention)
• The project proposal should describe the strategy
chosen for solving the problem and precisely how it
will lead to improvement.
 – The Implementing Organization
• This section should describe the capabilities of your
organization by referring to its capacity and previous project
record.
• Describe why exactly your organization is the most
appropriate to run the project
• its connection to the local community,
• the constituency behind the organization and what kind of
expertise the organization can provide.
• If other partners are involved in implementation provide
some information on their capacity as well.
• Project Goal and Objectives
• 6.1 Project Goal/Overall Objective/Aim
• This is a general aim that should explain what the core
problem is and why the project is important, i.e. what the
long-term benefits to the target group are.
• In principle, there should be only one goal per project. The
goal should be connected to the vision for development.
• It is difficult or impossible to measure the accomplishment
of the goal using measurable indicators, but it should be
possible to prove its merit and contribution to the vision.
• 6.2 Project Objectives/Project Purpose/Project Immediate
Objectives
• This is a more refined, specific, measurable, achievable, real,
and time bounded activities that contribute to the overall
achievement of a project goal.
• Project Implementation and Management Plan
• It is a kind of framework within which the project’s specific
objectives and the necessary project activities are stated in a
clear, precise, and meaningful manner along with the
responsible bodies/organizations.
• Project Activities: Format
• Work Plan /Activity Plan
• The activity plan should include specific information and
explanations of each of the planned project activities.
• The duration of the project should be clearly stated, with
considerable detail on the beginning and the end of the
project.
• In general, two main formats are used to express the activity
plan: a simple table and the Gantt chart.
• A simple table with columns, sub-activities, tasks, timing and
responsibility, is a clear, readily understandable format for
the activity plan.
• Project Implementation Management Strategy
• 8.1 Implementation Strategies
• Implementation strategies refer to the basic mechanisms the project
manager devises to actually carry out the project. These include:
• Distribution of leaflets,
• preparation of symposiums and trainings,
• Meetings with community groups and conducting focus group discussions,
etc.
• Implementation strategies of projects can vary from one to other
depending on the nature and characteristics of the discipline;
• the methodological approach of project planners;
• the actual context of the problem under consideration, and many other
possible reasons.
• 8.2 Sustainability
• Sustainability of a project implies the future fate of the project mainly
after the intervention/implementation period is completed.
• In this section of the proposal, the project manager should outline the key
mechanisms that can likely sustain the impact of the project done on a
certain problem and in certain community.
• Some factors can affect sustainability of projects. These include:
• Organizational sustainability
• Is the division of responsibilities between various organizations, groups
and or individuals clear?
• Have various stakeholders participated in planning, decision making and
implementation?
• Is the management plan good?
• Finance
• Have the long-term running costs been considered?
• Are there other possibilities for long-term financing?
• Technology
• Are local technologies and equipment being used?
• Does the project build on existing local expertise?
• Is there any training required?
• Risks
• Are there organizations or individuals who would prefer that the project
not be successful, and if so have any steps been taken to offset the
threat?
• Is there legislation that could negatively affect the success of the
project?
• In your proposal, you have to describe what steps you are taking to make
sure your project will be sustainable.
• Furthermore, you should effectively illustrate your long term plans for
continuing the work beyond the life of the project.
• Besides, the way will you use the results and resources developed by
this project and other resources can you create must be stated in a clear
and comprehensive manner.
• Risks and Assumptions
• At this part of the project proposal, the project
manager together with the project team
members should wisely predict and illustrate the
possible risk/s of the project,
• its probability, degree of impact, and possible
mitigation strategies.
• Risks and assumptions of a project are usually
stated in the following format.
• Expected Project Results
• This section of the project proposal states the possible results of the project.
• It is usually stated in the form of the following format.
• Monitoring and Evaluation
• At this stage of the project proposal the project manager/ project owners
should clearly indicate the ways of monitoring and evaluating the overall
project implementation process.
• More specifically, the project proposal should indicate:
• How and when the project management team will conduct activities to
monitor the
• Project’s progress;
• Which methods will be used to monitor and evaluate; and
• Who will do the evaluation
• Reporting
• The schedule of project progress and financial report could be set in the project
proposal.
• Often these obligations are determined by the standard requirements of the donor
agency.
• The project report may be compiled in different versions, with regard to the audience
they are targeting.
• Management and Personnel
• A brief description should be given of the project personnel, the individual roles each
one has assumed, and the communication mechanisms that exist between them.
• Budget
• In simple terms, a budget is an itemized summary of an organization’s expected
income and expenses over a specified period of time.
• The two main elements of any budget are income and expenditures.
• References
• References refer to anything cited in the text of the proposal.
• One must acknowledge the author/s of the source material/s used in
the development of the project proposal.
• A separate section entitled "Bibliography" lists other materials (books,
journal articles, etc.)
• related to the project but not specifically referred to in the document.
• Annexes
• The annexes should include all the information that is important, but is
too large to be included in the text of the proposal.
• This information can be created in the identification or planning phase
of the project, but often it is produced separately.
• The usual documentation to be annexed to the project proposal is:
• Analysis related to the general context
• Policy documents and strategic papers
• Information on the implementing organizations (e.g. annual
reports, success stories, brochures and other publications)
• Additional information on the project management
structure and personnel (curriculum vital for the members
of the project team);
• Maps of the location of the target area; and
• Project management procedures and forms (organizational
charts, forms, etc).
• QUALITIES OF A WELL WRITTEN PROJECT PROPOSAL
• A well written project proposal should be:
• Clear: which implies that the proposal should convey one and only one
meaning to what is written and it can be easily understood by the
reader.
• Accurate and Objective: which is to mean that facts must be written as
exactly as they are and presented fully and fairly;
• Accessible: project proposal must be developed in a way which is easy to
find needed information;
• Concise: conciseness of a project proposal implies that the proposal
must be written in a brief, direct, and in a to the point manner.
• Correct: the project proposal must be correct in grammar, punctuation,
and usage.