Agricultural project planning and and

analysis

1
Contents of the course

1.Introduction
2. Aspects of project preparation
3.Project cycle
4.Identifying costs and benefits of the project
5. Project Financial analysis
6. Project Economic analysis
7. Project appraisal

2
 Assignment

• Review categories of development projects

3
 CHAPTER ONE:INTRODUCTION

A project is a planned undertaking of interrelated and

coordinated activities designed to achieve certain specific
objectives within a given budget and period.

Can be defined as an investment activity in which financial

resources are expended to create capital assets
that produce benefits over time.

 Project contains:

• Activities, objectives, purpose, expected benefits and

costs which can be pre-determined before project
undertaking.
4
 Cont…..
• Absence of effective and well defined project
preparation is one major problem in LDCs.
• Economic development planners often give little
time to the preparation of suitable development
projects.
• A project is an instrument of change.
• It is coordinated series of actions resulting from a
policy decision to change resource combinations
and levels so as to contribute to the realization of
the country’s development objectives.

5
 Cont….
o Project represents a particular set of choices (or
interventions) over time to move from a present
situation to an envisaged future situation.

o A common feature of all projects is that they

o Have to be planned, financed and implemented
through
identifying possible costs & benefits associated with
the project.

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 POLICIES, PROGRAMS, PROJECTS AND PLANNING

• It is necessary to distinguish between projects,

programs, and policies because there is sometimes
a tendency to use them interchangeably.
• A plan is typically any diagram or list of steps
with timing and resources, used to achieve an
objective.
• Planning implies the working out of sub-
components in some degree of elaborate details.
The plan is the detail of how the project will be
accomplished.
7
 Cont…
• Every country has a systematically elaborated national plan
to hasten economic growth and further a range of social
objectives.

• Projects provide an important means by which investment

and other development expenditures foreseen in plans can be
clarified and realized.

• Sound development plans require good projects, just as good

projects require sound planning.

• Sound planning depends on the availability of a wide

range of information about existing and potential
investments and their likely effects on growth and other
national objectives. 8
 Cont…
 It is project analysis that provides this information, and those
projects selected for implementation then become the vehicle
for using resources to create new income.

• Realistic planning involves knowing the amount that can be

spent on development activities each year and the resources
that will be required for particular kinds of investment.

• Project refers to an investment activity where resources are

used to create capital assets, which produce benefits over time
and has a beginning and an end with specific objectives.

• Aprogram is an ongoing development effort or plan which may

not necessarily be time bounded.

• Examples could be a road development program, a health

improvement program, a nutritional improvement program, a
rural electrification program, etc. 9
 Cont…
 A development plan is a general statement of economic
policy.
 National development plans are further disaggregated into
a set of sectoral plans.
 A development plan or a program is therefore a wider
concept than a project.
 It may include one or several projects at various times
whose specific objectives are linked to the achievement of
higher level of common objectives.
 For instance, a health program may include a water project
as well as a construction of health centers both aimed at
improving the health of a given community.
 Projects, which are not linked with others to form a
program, are sometimes referred to as “stand alone”
projects.
10
 Linkages Between Program and Project

 The major difference between a project and a program lies

more in the scope, details and accuracy.

 A project is:

• A specific component of a broad program.

• Designed with a high degree of precision and details with

regard to its;
- objectives,
- activities,
- calculation of return and
- implementation plan.
11
A program is:

• Composed of a number of specific projects

• General
• Lacks details
• Lacks precision
• Aims at a broader goal related to a sectoral policy of a
country or departmental policy of an organization.

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 Basic characteristics of project

Project is to be SMART
S - Specific - objective, activities, benefits and beneficiaries.
M- Measurable - investment, production and benefits be
valued in financial, economic and social terms.
A- Area bounded - its area of operation must be clearly
identified and delineated.

R- Real - planning and analysis must be made on real

information of social, economic, political,
technical,…situations.

T- Time bounded - has clear starting and ending point.

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 Project analysis
 Every country more or less has basic resources such as:

• Labor (skilled and unskilled)

• Capital
• Land and other natural resources
• Entrepreneur

 These resources can be allocated in to different alternative

uses:

 production of consumption goods

 for public services (investment activities)

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
Objective of every country is to improve live hood of its
citizen through:

• Increase economic growth

• Reduce unemployment
• Keep inflation low
• Stabilize the economy
• Have positive balance of payment
• Have equitable distribution

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o Countries faced problem in allocating of resources to
many different uses.

o A choice therefore has to be made among competing uses

of resources based on the extent to which they help the
country to achieve its fundamental objectives.

Project analysis: is a way used to evaluate allocating of

resources in to alternative uses helps to maximize the
country’s objectives.

 To achieve some of this objectives requires sacrifice of

other objectives.

E.g - Unemployment and inflation

- Economic growth and equitability
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 Advantages

1. It coordinates efforts of various responsible organization

b/c it provides costs and benefits year by year.

2.It shows possible problems that may be encountered in

the implementation.

3. It encourages conscious and systematic assessment of

various alternatives.

4. It sets better criteria for monitoring and evaluation.

5. It serves as source of data.

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 Limitations

1. It depend on the quality of data used and forecast made.

2.There are always risk and uncertainty - no method that

can forecast it 100%

Risk - we can predict certain degree of precision

Uncertainty - we can’t attach any probability

• To minimize risk and uncertainty we may use sensitivity

analysis.

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3. Project analysis is a ‘partial analysis’, does not take in to
account relationship with other sectors as opposed to
other planning models.

4. It is difficult to fully address externalities or secondary

effects.

5. It is difficult to address all objectives of the country.

6. The greater difference between alternative projects the

more difficult to compare them. It requires further
analysis.
E.g. Health project and irrigation project

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 PART 2
ASPECTS OF PROJECT PREPARATION AND
ANALYSIS

The major aspects considered are:

 Technical aspects
 Commercial / market aspects
 Institutional - organizational - managerial aspects
 Financial aspects
 Economic aspects
 Social aspects
 Environmental aspects
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 Technical aspect

 Includes the works of Engineers, Soil Scientists, and

Agronomists in agricultural projects.

It is concerned with:

 Input supplies
 Out put estimates of real goods and services
 Technology of production and processing
 Location and site
 Machines and equipment
 Structure and civil works
 Project charts and layouts
 Work schedule
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 Commercial / market aspect

This is related to the study of the market condition for inputs

required and out put produced by the project.

 Needs to ensure existence of;

 Aggregate demand of proposed product or service in the

future

 The market share of the product under appraisal

 Project analysts need information and use appropriate

forecasting methods to give solutions for the above ideas.

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 The kinds of information needed are:

 Consumption trends
 Past and present supply conditions
 Production possibilities and constraints
 Imports and exports
 Cost structure
 Elasticity of demand
 Consumer behavior
 Marketing facilities (transportation, storage..)

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Institutional - Organizational - Managerial Aspect

 We have to see structure of the project in that:

 Is it dependent on other organization or independent?

 Can we find competent managers in the local market?
 What are the institutions involved in the project and the
responsibility of each organizations?
 Who is responsible to which activity?
 What are the incentive mechanisms?
 Etc..
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 Financial aspects

 Need to determine / assess:

 The cost of investment (the quantity of each input in
future term)
 Operation costs
 Benefit that will be obtained from the project
 The source of finance and credit term
 The credit worthiness of the project
 The financial efficiency
 Breakeven point
 The financial risks involved in the project
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 Economic aspects

 In financial analysis we use market prices as a measuring

rode and responsible groups are Accountants.

 In economic analysis we need to adjust market price in to

economic price or ‘efficiency price’, ‘shadow price’ to
better approximate the opportunity cost of an input.

• To value projects out put, economic analysis uses the

marginal value of that output to approximate the real
value.

• The responsible groups are economists.

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 Marginal value is:

Market value of the out put resulting from one additional

unit of input, computed by multiplying the marginal
product by the unit selling price of the additional output.

 In Economic analysis We need to adjust market price in to

economic price because market price may not reflect true
value of goods and services.

Why?

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 The reasons are:

1. Some markets are imperfect (have monopoly power)

E.g. ETV, ELPA - few price makers, consumers are price
takers

2. There are some government interventions:

 Imposing of tax - addition of tax

 Subsidy - market price might become undervalue
 price control - putting floor price and ceiling price
 Foreign exchange control - 1$ = 56 birr - bank
1$ = 117 birr - black market
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3.There are externalities (positive and negative)

 External costs - are costs that are not incurred by the firm
(project) but are incurred by society.

 External benefits - are benefits earned by the society outside

of the project.

 Economic benefit - are direct benefits plus external

benefits in terms of money.

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4. There are some missing markets

E.g. A Project may given land freely:

 No cost of land in financial aspect
 But in economic aspect the cost is not zero because
there is opportunity benefits by other users through
cost.

• The financial analysis views the project from the

owners point of view.

• While the economic analysis from the society point of

view.

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 Social analysis

 Social cost - benefit analysis is the assessment of a

project’s effect on:

 Income distribution, employment opportunity, gender

aspect, regional integration, etc..

 Our fundamental objective is economic growth (national

income).

E.g. If a project get 10 million birr/year, results in addition

of this amount of value to the country’s economy.

Again we say that 10 million birr will add to the social

benefits of the country (gender, equity, employment..)
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 Environmental aspect analysis

 This is the analysis of the effect (positive or negative) of

project on the world of animals, human being, plant,
natural resources (water, soil, air,…).

 It is specially a pre- requisite for a project financed by

foreign donors such as World bank, IMF,…

 The benefit of project sometimes may be counter

balanced by undesirable environmental effects.

 The problem with the assessment of environmental effect

is to measure the effect of a project in monetary value.

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 There are basically two ways of measuring environmental
externalities:

1.Direct method - using market price

2.Indirect method

a.Contingent valuation - willingness to pay

b.Travel cost method - valuing parks and historical areas
to visit.

c. Avoidance expenditure - how much people expend to

avoid negative externalities.

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d. Hedonic wage/property value

E.g. Assume two houses A & B with the same quality

but in different location.

House A (in polluted area) - costs 400 birr rent

House B (in clean area) - costs 500 birr rent

 Then 100 birr difference is the cost of pollution.

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 PART 3.THE PROJECT CYCLE
 It is the sequence of events that a project planning and
analysis follow.

 There are six possible phases:

 Identification
 Pre-feasibility
 Feasibility
 Appraisal (selection and project design)
 Implementation
 Ex-post evaluation

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 Identification

 Identification of promising and potential projects is

desirable.

 It may take two forms

• It can be private project - the owner sets the objectives &

expectations market economy context is the initiation
entity.

• It can be government project - development plan and

strategies and sectoral information is an important source
of identification..

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 Four major Source of ideas project

1. Technical specialists
2. Local leaders and the society as a whole
3. Development plans
4. Entrepreneurs

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 Identification of project ideas based on aspects such as;

• Need - need of intervention

• Market demand - domestic or foreign
• Resource availability - utilization of available resource
• Technology - use of available technology
• Natural calamity - flood, drought
• Political considerations
 Possible alternative project must be assessed.

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 Project preparation and analysis

 Critical element of project preparation is: Identifying

and comparing technical and institutional alternatives for
achieving the project’s objectives.

 Preparation requires feasibility study until satisfactory

project is selected.
 Feasibility study has two phases:

1. Pre-feasibility study
2. Feasibility study

 Basically the content of the two studies are the same, the
main difference is in the depth.
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 Pre-feasibility study

• It is a preliminary assessment that formulate the way for

launching the full assessment of feasibility study.
 This phase intended to assess:
• Whether the project is prima-face worthwhile to
undertake
 To identify which first aspect requires detail investigation
• We need to assess all aspects of projects (technical, social..)
 We estimate the financial and economic costs and
benefits.

 If it is found worth or viable we have to go to the next

40
step.
 Feasibility study

• It is detail investigation or assessment of all aspects of

a project.

• It is preparation of project document.

• We have to incorporate also the risk aspects.

 The final output of this step is project document or

feasibility report which contains all aspects analysis.

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 Project appraisal

• Appraisal is a critical review of all aspects of a project.

• Select the most likely project out of several alternative

projects.

 There are two methods of measuring the project

worthiness.

1. Un-discounted measures
2. Discounted measures

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 Discounting is away of bringing the future values to its
equivalent present value.

 Both measures having their advantage and limitations.

 We have to choose one measuring techniques in order

to compare the projects worthiness.

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 Implementation

• Project design - financing - implementation

• It is the translating of an investment proposal in to a

concrete project.

 Which is complex
 Time consuming
 Risk fraught

 Timely implementation is very critical.

 Delay of implementation would bring substantial cost

over-run.

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 Implementation has to be flexible (because things will
be changed).

 It is divided in to three time periods:

1. The investment phase -major investment

2. The development phase
3. The project life

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 Ex-post evaluation

 Final phase of project cycle.

 It is an Assessment of project impact.

 Evaluate the success or failure of project whether it

finish its service or not.

 Give Lesson for revising of a project.

 Compare actual performance with projected

performance.

 It examine the project plan and what is really happened.

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 A feedback devise from this phase is useful in many ways:

1. It tests the assumptions.

2. It provides document for future decision.
3. It provides corrective actions which can go with real.
4. It shows an attainable assumptions.
5. It induces a desired care among sponsors.

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 Gender mainstreaming in PCM
What is gender equality? when it is achieved?

What is gender mainstreaming?

What is the importance of gender

mainstreaming in PCM?

48
 Cont…
• Gender equality is achieved when women
and men, girls and boys,
• Have equal rights for
– life prospects and opportunities,
– equal power to shape their own lives and
– contribute to society

49
 Cont.
• Process of assessing the implications for
women and men of any planned action
program or policy
– in all areas
– at all levels
• Before any decisions are made and
throughout the whole process.

50
 Cont…
• Program in turn contribute to the national
policies and priorities
• There fore, contributes to the achievement of
national policy goals
• Gender equality of opportunity and women's
empowerment are essential for economic
growth.

51
Gender mainstreaming in PCM

52
 Cont…
• Gender mainstreaming is fundamental
• Gender inequality and women's
disempowerment are key factors in creating
poverty.
• Gender inequality means women have higher
representation amongst the poor
• Enabling women to realize their full potential
requires
– removing gender inequalities
– removing discrimination which constrain them at
every level
53
 Cont…
• Do men and women, boys and girls of
different target groups equally benefit so far
from the results achieved?
• Are equal opportunities and gender equality
taken into consideration in the phase-out
and hand-over of the project?

• Has the project contributed to sustained

women’s rights and long lasting
improvement of gender equality?
54
 Cont…
• Key gender concerns

• Gender analysis/Context - specific - aims to

assess gender relations and gender inequalities
• by looking at specific social, economic and
political aspects such as
– gender roles and division of labour,
– access to and control over services and
resources,
– participation at different levels,
– needs and interests;
55
 Cont…
 there is a need to focus on a specific group

 Operational measures - to ensure gender- equitable

participation in and benefit from project activities

 When formulate the project, it must consider both external

&
internal constraints and opportunities for gender equality:

 External: what opportunities and problems could affect

women’s and men’s equitable participation, access to
decision-making and benefit from the project?

56
 Cont…

 Internal: a dialogue within and between different institutional

stakeholders must assess to what extent project’s
implementation institution and its key partners are willing, able
and equipped to work with gender.

 Intervention: what are the appropriate project components and

activities to address the constraints and opportunities for
gender equality?

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 PART 4

IDENTIFYING PROJECT COSTS AND

BENEFITS

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 Objectives, cost and benefits

 Costs and benefits will be defined based on the objectives.

• Costs - are any thing that reduce our objectives.

• Benefits - are anything that increases or contributes to our

objectives.

 Costs for some groups may be considered as benefits for

others and vice-versa.

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 Each participant in the project has its own objective

Increase HH income
Educating children
Reducing work hours
Paying debt
Meet social obligations

• These objectives affect farmer’s choice of cropping pattern

and income generating capacity of a project.

• It is difficult to incorporate all objectives, then we need to

identify the fundamental objectives.

• Private business firm and society or nation has their own

several objectives.
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• We have to take maximization of income for private firm
and maximization of net incremental benefit for nation as
the fundamental objectives in analysis of project.

• We use two types of analysis in identifying costs and

benefits:

Financial analysis:

 We view project from owner or implementing agency

prospective and thus we are interested in the items that
require monetary outlays.

• Anything that reduces the profit of the owner is a cost and,

• Anything that increases the profit of the owner is a benefit.

61
 Economic analysis:

 look projects from perspective of the entire economy or

society, thus we are interested in the opportunity cost for the
country.

Accordingly:

• Economic costs are anything that reduce the national income

of a country and,

• Economic benefits are anything that increases the national

income of the country.

 In economic analysis all finance of project comes from

GDP. 62
 The difference between financial and economic analysis is
in the price that the project entity uses to value the inputs
and outputs.

• Financial analysis based on the actual (market) price that

project entity pays for inputs and receives for out put.

• In Economic analysis the price are based on the opportunity

cost to the country.

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 Economic values of out puts and inputs differ from
financial value (market price).

Because:

• Market imperfection
• Government interventions
• Some goods are public goods

 The analysts have to identify the gainers (beneficiary of the

project) and losers (pay costs of the project).

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 Categories of costs and benefits

These are: Direct transfer payments, cost of inputs,

contingency allowances and sunk cost.

Direct transfer payments: are payments that represent:

• Shifts in claims to goods and services from one entity in the

society to another and,

• Do not reflect changes in national income.

 These are:

 taxes, subsidies, loans, debt services (the payment of

interest and repayment of principal).
65
 Tax
• Monetary out lay as financial cost for the project.

• Nothing to do with NI.

• Project owner’s net benefit reduced when tax is paid.
• Firm payment of tax doesn’t reduce NI.
• Tax is transfer of income from firm to government (used
for
social purposes).
• Tax does not treat as a cost in economic analysis

66
 Subsidy

• Simply, direct transfer of payment as opposed to tax.

• Monetary benefit to project owner.

• It is not benefit in economic analysis.

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 Credit transactions

• Major form of direct transfer payments in project.

• Receipt of loan increases production resources.
• Repayment of principal and Payment of interest are costs
to the owner.
 In economic analysis it is cost only when the loan is spent.

 Financial analysis of projects is based on cash flow analysis

which omits some important items that appear in profit
and loss statements.

In project analysis costs are considered when they are spent.

 But in profit and loss statement of an established firm,

costs are accounted when they are incurred.
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 Depreciation allowances

• Depreciation is the amount in decreasing of the total (initial)

value of a material due to its service value.

• It is cost in financial analysis.

• It is not considered as a cost in economic analysis.

Suppose the cost of machinery with initial cost 10,000 and life
time of a machinery is 10 years. Annual depreciation cost is
1,000 using straight line method.

 1,000 is saved amount of a machine, then we can replace

the machinery after 10 years because we gain and save
1000 every year.
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 Costs of inputs
Physical goods:
• Valuation is not a problem.
• Planning the required amount is a problem.
• Need to adjust market price in to economic price by
removing the effects of market distortion.

Eg. The price of shoe = 90 (producing value ), there is 10 birr

tax by government = 100birr .

• Economic cost is 90 birr.

• Financial cost is 100 birr.

 If government subsidizes 30 birr to project:

• Financial cost = 70 birr.
• Economic cost = 100 birr.
 Labor: skilled and un- skilled

• When the project uses family labor the problem of valuation

may arise.

• In economic analysis always we have to find economic price of

labour.
 Suppose a project use labor that was previously employed in
agricultural sector. The project is paying a wage rate of 15 birr
per day per worker. Let the project employed 100 workers.

 The economic cost of the project is 1500 birr per day.

 Assume also each 100 labour was producing 10 birr value of output per day
before being employed in the project.

Then economic cost of using labour will be 1000.

 Economic cost means costs which reduce national economy.

 Economic benefit means benefits which increase national

economy.

 The country is losing 10 birr per day because the project

takes this workers.

 The 10 birr value is called the opportunity cost of labour.

 Opportunity cost is the amount of income forgone from the

next best alternative use.
 Land

 In this case also we take the opportunity cost of the land that
the amount of income would be obtained if the land was used
for some other alternative use.

 The problem is valuation of the land due to special kind of

land market conditions.

• In financial analysis take market price for inputs, and if no

market price, then we say it has no cost.

• But in economic analysis we take opportunity cost or

economic prices of that input.
 Contingency allowances

• Good plan have to consider the provision be made in

advance for possible adverse changes in physical conditions
or prices that would add to the baseline costs.

Two ways:

 Physical Contingencies and Prices Contingencies

• Physical Contingencies is a real cost and will reduce the final

goods and services available for other purposes.

• It cost in both financial and economic analysis.

 Prices Contingencies

Relative change in prices: a rise in relative cost of an item

implies that its productivity in the society has increased, that is,
its potential contribution to national income has risen.

 Price of inputs may increase or price of out puts may decline.

• Costs may be incurred due to possible relative changes in

prices and will be considered as a cost in both financial and
economic analysis because it is a real change.

• Relative change in price of inputs affects the relative value of

inputs and also affect value of output.
 General change price (inflation):

• Do not affect national income thus it is not considered in

economic analysis because it is not real change it is simply a
nominal (supposed) change.

• All prices are affected equally.

 If it significant, provision for its effect on project cost

needs
to be made so that, an adequate budget is obtained.
 Sunk cost

• Are those costs incurred in the past up on which a proposed

new investment will be based.

• In project analysis always we have to look in to future

earning or benefit and future cost by forgetting the past
cost and benefits.

 It does not appear in both financial and economic accounts.

 Tangible benefits of projects

• Tangible benefits are real increase in value of commodities or

reduction in costs, and will be considered in both financial
and economic analysis.
These are:
• Increased in production
• Quality improvement
• Change in time of sale – adds time utility
• Change in location of sale – adds place value
• Cost reduction – reduce labour cost through technology
• Losses avoid – ‘with and without project’
• Risk avoided/reduced
 Externalities

1.Secondary costs and benefits

2. Intangible costs and benefits

1. Secondary costs and benefits

• Project can create benefits or incur costs to the society

outside the project, that is 20 cost & benefit of project.

• Economic analysis accounts secondary costs and benefits.

 We have to adjust market price in to economic prices for

externalities, then converting them to direct costs and
benefits to avoid double counting.
 Examples

1. Price effect:

 Which caused by project is one type of externalities.

• When project needs more inputs it increases price of market.

 When project produce more output it decreases price of

market.

• Project has forward lineages effect with industries that use

output of project.

• Project has backward linkage effect with industries that

supply input for project.
 Other producers may lose due to competition and pay
high prices to get input which required by the project.

2. Technological externalities
3. Multiplier effect of projects
4. Ecological effects of projects:

• Construction of dam (positive or negative effect), increase

or decrease spread of disease, downward stream effect.
 2. Intangible cost and benefits

• These are costs &benefits which results from project to the

external world, which are not accounted in financial analysis
but have to be accounted in economic analysis at least in
qualitative terms.

• The project may has also effect on country beyond the border.
 Intangible benefits are:
• Creation of job opportunity
• Better health
• Better nutrition
• Reduce incidence of disease
• National integration
 Intangible costs are:

• Displace of workers
• Increase regional income inequality
• Destroy scenic beauty area
• Increase incidence of disease
 With and without project comparison

• In analyzing projects, the with project conditions must be

compared against the without project condition.

• This is different from the “before- and – after” comparison.

 Assume the improvement project will improve the income

of the farmer at 3% per annual.

• The contribution of project in with and without comparison

is 2%.

• But in before and after comparison, the project contribution

is 5%, it over estimate the contribution.
Net
5% = with project
benefit
Incremental net benefit = 2%
3% = without project

Year

85
 For the case of lose avoid projects:

• The net benefit of project by ‘with and without project’

comparison = 8%.

• The net benefit of project by ‘before and after project’

comparison = 3%.

• Before and after comparison in this case fails to consider the

net benefit of the project due to the loss avoided.

• So, it under estimate the net incremental benefit of the

project.

• The ‘with and without’ project assessment requires the assessment of

the
past trend and prediction of the future in the project life time. 86
Net benefit

3% with project
Increment in net benefit due to
land improvement of project

Decline income due to degradation

5% without project
Year

87
 Separable components

• A project may constitute different components as a part of

the project such as production, marketing, processing etc.

• In assessing the project, we have to separate each activity

independently and each activity has to justify itself.

• We chose the one which can generate the highest net

incremental benefit.

• Drop any component that has negative NPV even if the

total net benefit is positive.

88