CHAPTER THREE

PROJECT IDENTIFICATION
AND FORMATION

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 Project Idea
 Project identification is the first and perhaps, the most crucial stage of
project cycles.
 Every project starts as new ideas, carefully examined and if found feasible
and desirable are translated in to projects.
 Finding potential projects with positive NPV or provide benefits for the
society.
 Project conception - developing ideas regarding a required intervention
in a specific area to address a problem.

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 Project Profile or Concept
3.1. Project Concepts and Profiles
Once a project idea has been conceived, the next stage is to describe
the idea so that it can be prioritized and move on to the next stage in
the process.
to have a clear idea of what the proposed project is
 A project concept or profile should be short but should include the
following:
Justification and purpose
Beneficiaries and stakeholders

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 Project Profile Cont’d…
Resources and institutions

Policies and plans

Impacts

Support

Risks

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 Steps of Project Identification
There are four phases of project identification. These are:
1. Generation of project idea
2. Description of project Idea
3. Screening
4. Prioritization
1. Generation of project idea
 searching for promising project ideas which can satisfy the needs and
wants (social, political, economic, technical or environmental).

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 Stimulate the flow of information/data
a. SWOT Analysis: analysis of firm’s resources and environment and
conceive of project.
a. Monitoring the external Environment
 Economic Sector (State of the economy, Overall rate of growth)
 Governmental sector (Industrial policy, Subsidies, incentives, Import
and export policies).
Technological Sector (Emergence of new technologies
 Socio-demographic sector (Population trends, Age shifts in population
& Income distribution).

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 Process of Project Identification Cont’d…
b. Clear Expression of Objectives
articulation and prioritization of objectives guides and encourages
employees to think more imaginatively.
Operational objectives of a firm may be one or more of the following:

Cost reduction

Productivity improvement

Increase in capacity utilization

Improvement in contribution margin etc.

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 Process of Project Identification Cont’d…
c. Fostering a Conducive Climate
to tap the creativity of people and to harness their entrepreneurial urges.
Sources of project ideas
 Projects can be:
 Resource based: originate from available resources.
 Market based: arising from an identified demand in home or overseas
markets.
 Need-based: to make available to all people in an area of minimal
amounts of certain basic material.

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 Process of Project Identification Cont’d…
Sources of project ideas are classified in to two types:
Macro sources: requires an analysis of the overall investment potential.
 reflected from national, regional and Sectoral level sources.
Micro Level Source/Enterprise Approach – reflected from an industry or
firms which requires analysis of a firms or an industry.

2. Description of project idea: a written description of the project idea

or concept.

3. Screening
Once a list of project ideas has been put forward, the first step is to select
one or more of them as potentially promising.
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 Cont’d….
Factors to be considered in preliminary screening/selection of
project ideas or to eliminate a non promising ideas are:
 Compatibility with the promoter
 Consistency with government priorities
 Availability of inputs
 Adequacy of market
 Reasonableness of costs
 Social cost and benefits
 Acceptability of risk level
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 Cont’d….
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

4. Prioritization: the ranking and selection of projects against a set

of criteria to identify the best projects.

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 Cont’d….
Project Rating Index (Prioritization & Ranking)

Steps:

1. Identify factors relevant for the project rating

2. Assign weights to these factors (reflect their relative importance)

3. Rate the project proposal using a suitable rating scale (5-point or a

7-point scale).
4. For each factor, multiply the factor rating with the factor weight to get
the factor score.

5. All the factor scores to get the overall project rating index.
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 Cont’d….

Factors Factor Rating Factor

weight VG(5 G(4) A(3) P(2) VP(1) scores

Input availability 0.25  0.75

Technological know how 0.10  0.40
Reasonableness of cost 0.05  0.20
Adequacy of markets 0.15  0.75
Complimentary relation with other 0.05  0.20
products
Stability 0.10  0.40
Dependence on firm’s strength 0.20  1.00

Consistency with government 0.10  0.30

priorities
RATING INDEX 4.00

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