MODULE 3 RURALINVEST MODULE 3 · 2021. 2. 8. · 1. INTRODUCTION TO RURALINVEST 2 A. The purpose of...
Transcript of MODULE 3 RURALINVEST MODULE 3 · 2021. 2. 8. · 1. INTRODUCTION TO RURALINVEST 2 A. The purpose of...
Further information on RuralInvestor other FAO Investment Centreproducts and services can beobtained from:
DirectorInvestment Centre DivisionFood and Agriculture Organizationof the United NationsViale delle Terme di Caracalla00153 Rome, Italy
Tel: (+39) 06 57054477Fax: (+39) 06 57054657
E-mail: [email protected] site: www.fao.org/tc/tciFAO Web site: www.fao.org
RURALINVEST
In recent years, locally designed and managed investment projectshave assumed increasing importance as effective tools forsustainable rural development. Supporting local communities toconceive and implement their own projects – whether for incomegenerating activities or for social investments – not only ensuresgreater ownership and commitment to those projects, but alsostrengthens the capacity of communities to contribute to andmanage their own development. However, the increasing adoptionof this approach by national governments, international financingagencies and rural banks has also highlighted the critical importanceof providing adequate support and guidance to national techniciansworking with communities and other groups in identifyinginvestment needs, defining potential projects, and developing themfor external financing.
RuralInvest answers this need by offering a series of modules,developed over a number of years and tested extensively in the field,which provide such support through a range of materials andtraining courses, and include technical manuals, custom developedsoftware and instructors’ guides. Modules currently in use or underdevelopment include:
Module 1: Participatory Identification of Local Investment Needs
Module 2: Preparing and Using Project Profiles
Module 3: Detailed Project Formulation and Analysis
Module 4: Monitoring and Evaluation of RuralInvest Projects
An associated training course "Assessing Demand for RuralInvestments" is also available to assist technicians to evaluatemarket and non-market demand for project outputs.
Module 3: Detailed Project Formulation and Analysis
Following on from earlier needs identification and project definitionactivities, Module 3 provides guidelines to assist local technical staffin developing high quality project proposals suitable for externalappraisal and subsequent monitoring and evaluation. Drawing onMS Windows-compatible software which can be extensivelycustomised to meet user needs, the Module facilitates thepresentation of essential project data and automates key calculationssuch as cash flow, working capital requirements, rates of return,employment generation and costs per beneficiary. The Modulecomprises this technical manual, software with a user’s guide, andtraining materials with an associated instructor’s guide.
MODULE 3
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MODULE 3
DETAILED PROJECTFORMULATIONAND ANALYSIS
R U R A L I N V E S T
A participatory approach to identifying andpreparing small scale rural investments
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TC/D/A1421E/1/11.07/500
MODULE 3
A participatory approach to identifying andpreparing small scale rural investments
DETAILED PROJECTFORMULATIONAND ANALYSIS
Rome, ItalyOctober 2007
Investment Centre DivisionFood and Agriculture Organization
of the United Nations
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The designations employed and the presentation of material in this informationproduct do not imply the expression of any opinion whatsoever on the part of theFood and Agriculture Organization of the United Nations concerning the legal ordevelopment status of any country, territory, city or area or of its authorities, orconcerning the delimitation of its frontiers or boundaries.
All rights reserved. Reproduction and dissemination of material in this informationproduct for educational or other non-commercial purposes are authorized withoutany prior written permission from the copyright holders provided the source is fullyacknowledged. Reproduction of material in this information product for resale orother commercial purposes is prohibited without written permission of the copyrightholders. Applications for such permission should be addressed to the Director,Investment Centre Division, FAO, Viale delle Terme di Caracalla, 00100 Rome, Italyor by e-mail to [email protected]
© FAO 2007
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1. INTRODUCTION TO RURALINVEST 2
A. The purpose of RuralInvest 2
B. The special nature of rural investments 3
C. Type and scale of projects appropriate for RuraInvest 4
D. The RuralInvest modules 4
E. RuralInvest users 6
2. THE DETAILED FORMULATION AND EVALUATION PHASE 10
A. Main elements of formulation and evaluation 10
B. Software scope and requirements 11
C. A brief warning 11
3. ESTIMATING DEMAND AND BENEFITS 14
A. Estimating demand in the presence of markets 14
B. Estimating demand in the absence of a market 19
4. EVALUATION AND SELECTION OF TECHNOLOGY 24
A. Reconfirmation of the scale of the project 24
B. Choosing the production technology 24
C. Experience and capacity of the applicants 25
D. Maintenance and repair 26
5. SUSTAINABILITY AND ENVIRONMENTAL IMPACT 28
A Why consider environmental impact? 28
B. What is environmental evaluation? 29
C. Procedures and stages of environmental evaluation 30
D. Assessment stages for category b and c projects 30
E. Special cases 31
F. Monitoring environmental impacts 33
G. Specialized support and environmental studies 33
H. Social impacts of rural investment projects and sustainability 33
I. The sustainability of non-income generating investments 34
TABLE OF CONTENTS
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VI. ESTIMATING COSTS AND INCOME 38
A. Verification and classification of costs 38
B. Assigning costs and income by activity 41
VII. FINANCING THE INVESTMENT 50
A. Credit requirements 50
B. Loan characteristics 51
C. The changing value of money over time 52
VIII. ORGANIZATION AND MANAGEMENT OF THE INVESTMENT 56
A. Ownership structure 56
B. Supervision and oversight 57
C.Daily management 58
D.Technical assistance and managerial support 59
IX. FINANCIAL ANALYSIS AND THE PREPARATION OF RECOMMENDATIONS 62
A. Measurements of the investment’s feasibility 62
B. The impact of taxes 64
C. Preparation of recommendations 64
X. PREPARATION FOR THE INVESTMENT AND BEYOND 68
A. The importance of support and follow-up 68
B. Reaffirmation of the commitment of the applicants 68
C. Accompanying the applicants in financial negotiations and
seeking legal permits 68
D. Support in preparing a start-up plan 69
E. Purchase and contracting of goods and services 69
F. Follow-up to the implementation process 69
ANNEXES
APPENDIX 1A: Environmental Categorisation of Projects 72
APPENDIX 1B: Checklists for Environmental Assessement 79
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Chapter I
INTRODUCTION TO RURALINVEST
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INTRODUCTION TORURALINVEST*
The following document forms part of a "toolkit"comprising manuals, training materials and
computer software, that together provide a basisfor a relatively simple, yet reliable, approach to theidentification, formulation, implementation andevaluation of small-scale community or familyinvestment projects in rural areas.
RuralInvest was originally developed by staff of theInvestment Centre of the United Nations Foodand Agriculture Organization (FAO) in response torequests for a readily usable approach to theidentification and preparation of investmentsmuch smaller than those traditionally consideredin published guidelines 1
FAO, in cooperation with the multi-agency"Regional Unit for Technical Assistance" (RUTA) inCentral America, translated these initialexperiences into a general methodology andtoolkit, which have now been tested in a numberof countries with considerable success. As thenumber of users has grown, it has been possible toimprove and expand the different elements of theRuralInvest toolkit, as well as offer the package ina number of other languages.
A. The Purpose of RuralInvest
In recent decades many governments have begunto encourage local communities to assume a moreactive role in decisions concerning their owndevelopment. Often referred to as CommunityDriven Development (CDD), this has includedsuch measures as the transfer of financial resourcesto municipalities, the decentralization of publicagencies, and the creation of local investmentfunds (sometimes known as Demand-Driven RuralInvestment Funds or DRIFs). Using theseapproaches governments and internationalfinancial agencies have created new possibilitiesfor people to effectively participate in, andinfluence, the decisions that contribute to thesocio-economic development of their community,municipality or district.
Selection of investments at local level is notwithout its problems, however. It is not alwayseasy to determine which investments will yield thebest results. It may be that a bridge would have
* This document was prepared by Aidan Gulliver, Dino Francescutti and Katia Medeiros of the Investment Centre, FAO,Rome, with contributions from many other FAO and RUTA staff members.
1. "Guidelines for the Design of Agricultural Investment Projects", Technical Paper No. 7, Investment Centre, FAO, Rome,1992. This is a good example of a methods and procedural manual, designed for the preparation and evaluation oflarge-scale projects.
greater impact on a community than a new well,or that a dairy processing plant would make agreater contribution than an irrigation system, buthow to decide between them? Furthermore, notall investments are sustainable. An investment thatinitially generates strongly positive results for thecommunity may turn out to be simply tooexpensive to keep running (e.g. a local hospital),or to result in the destruction of natural resourcesthat cannot readily be replaced (e.g. a sawmill).
Over the course of many years, most developingcountries have built up a national capacity toformulate and analyse investment proposals,utilizing a small cadre of internationally trainedstaff located in those ministries and agenciesresponsible for economic and social planning.Using international formulation and appraisalprocedures, and often supported by specialistconsultants from international financing agencies,these highly trained staff have traditionallyfocused on preparing key multi-million dollarinvestments. The feasibility study for a newhydroelectric dam, for example, could take yearsand involve a multi-volume report costing millionsof dollars.
However, these staff typically have littleexperience in the analysis of smaller scale projects,where such in-depth analysis is clearly notjustified. Furthermore, even if these expertsadapted their procedures to the study of smallprojects, there would simply be too few experts tosupport the dozens of decentralized projects, thescores of autonomous municipalities, or thehundreds of community groups that are nowseeking to identify and formulate their ownprojects. What is needed is a different approach;one that that can be used to formulate andapprove small-scale projects using only localtechnicians and resources.
In general, three possible procedures can be usedto select and approve projects prepared at locallevel. These are:
1. Applying standard procedures andexclusions
The first option is for the funding agency toestablish standard procedures and exclusions, andaccept all projects that meet these criteria. Thesemight include:
c Requiring the signature (or mark) of amajority of the community or groupapplying
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c Requiring the approval of the local Mayor orCouncil
c Excluding certain kinds of investments (forexample, no projects that might damagethe environment or religious structures willbe allowed);
c Excluding projects with investment costswhich exceed a per capita limit (that is thecost per beneficiary).
This option offers the communities or applicantgroups a high degree of autonomy in choosingtheir investments, but the absence of anyevaluation mechanism creates a high risk offinancing projects that are either infeasible orunsustainable.
2. Predefined investment models for eachexpected type of project
In this second option, a detailed study is carriedout for a number of "model investments", eachrepresentative of the type of proposal that areexpected to be received from participatinggroups, communities or municipalities. Allproposals must then use these models as the basisfor their submissions. This method has theadvantage of ensuring generally well designedprojects (because experts can be called in todesign each model), especially for infrastructureprojects that can be replicated from one place toanother (e.g. a health clinic).
However, predefined projects do not easily allowfor changes to the basic designs and thus riskfunding investments unsuited to local conditions(e.g. an irrigation system). They also tend to limitthe degree of local involvement and ownership, asdesigns are pulled "off-the-shelf", with little rolefor the local community. The need to followstandard designs and ensure identicalconstruction also tends to favour the use ofprofessional contractors rather than local labour,limiting local involvement even further. Finally, theuse of model investments generally excludes thepossibility of innovative projects for which nomodels exist. They are thus inappropriate whenfinancing a wide variety of rural investments.
3. Local-level project identification, designand analysis
The design and evaluation of projects at local leveloffers significant advantages, including: (a) thedesign of projects that arise from, and respond to,local needs, priorities and circumstances; (b) thedevelopment of a local capacity not only toformulate and evaluate investment projects, butalso to manage their own development process ina wider sense; and (c) the creation of a real
commitment to, and ownership of, the proposalson the part of the applicants, as a result of theirparticipation in the formulation process.
However, this approach undoubtedly requires agreater level of effort and cost than the others,both in the initial training of local technicians andin their subsequent work with applicants. In mostcases local technicians will also need to besupported by subject-matter specialists (e.g.irrigation engineers, architects etc.) and beadequately supervised, to ensure the quality andcorrectness of the designs developed. A numberof attempts to use this approach in the past haveproven to be unsuccessful, largely due to theinability of local staff to effectively master thecomplex investment formulation tools developedfor use in multi-million dollar projects.
To avoid these problems, the project design andevaluation process must be brought within thereach of local technicians and the communitiesthey serve. RuralInvest provides the tools toachieve this objective, using a number of separatebut interlinked modules which simplify the tasksof priority setting, project identification, detailedproject design and analysis, and finallymonitoring and evalaution of the implementationprocess.
B. The Special Nature of RuralInvestments
The key factors to be considered in theidentification, formulation and selection of aninvestment are the same whether it occurs in therural or urban sector. In fact, it is possible to applyRuralInvest to any type of small or mediuminvestment, rural or urban. However, RuralInvestconsiders a number of special features that areimportant only for projects in the rural sector:
a) The seasonal nature of many ruralactivities. Unlike urban investments, manyrural projects must take into account theavailability of resources (land, labour, capital)in different months of the year and relatethem to differing production patterns (e.g.crop and livestock activities). In addition,fixed costs may exist which are spreadthroughout the year, including duringperiods when no productive activity isunderway.
b) The heavy dependence on the use ofnatural resources. When evaluating possiblerural investments, environmental and naturalresource sustainability are often criticalfactors for long-term success.
c) The dispersion of human and economicactivities. Rural populations tend to be
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spread out, limiting access to infrastructure(roads, electricity) and services (schools,health clinics). Equally, input supplies,markets and other productive elements arealso dispersed. This means that greaterattention needs to be paid to such aspects asavailability of inputs and the cost ofdelivering the finished product to the buyer.
C. Type and Scale of ProjectsAppropriate for RuralInvest
RuralInvest distinguishes between two broadtypes of investment projects: those designed togenerate income, that is, for profit, and projectswhose principal purpose is not profit related.
The category of income-generating projectscovers a wide range of possible activities:agricultural production, aquaculture, rural shops,irrigation, agroindustry, handicrafts, tourism,transport, the fabrication of simple machineryand spare parts, and marketing services. Aproject may, in fact, require investment in morethan one of these areas, and will frequentlyinvolve more than one type of productive activityfrom the same investment (e.g. production ofdifferent crops as a result of investment inirrigation)
The category of non-income generating projectsalso includes a broad range of activities and canbe divided into three distinct sub-groups:
c Production support: Including access roadsand bridges, electrification andcommunications, as well as primaryirrigation infrastructure;
c Social projects: Health and educationservices, provision of drinking water andsewage disposal, and support forcommunity organization;
c Environmental projects: Watershed and slopeprotection, reforestation and soilconservation.
It is important to note that projects in the non-income generating category may often includea user fee or charge designed to recover someportion of the operating costs. However, unlikethe "for-profit" projects, this income neverprovides the justification for the project, butmerely contributes to its sustainability.
Although the participatory methodology stressedthroughout the RuralInvest approach renders itparticularly appropriate for use with groups andcommunities, there is no reason at all why it cannot be used by individuals or families. However,
such personal applications generally omit thedetailed needs identification and priority settingthat is central to the first Ruralinvest module, andcommence directly with the project profile.
The project profile is the starting point for bothincome generating and non-income generatingprojects. Micro-investments (very simple projectswith an investment below US$5,000) often maynot require further preparation beyond this stage,as financing can be decided on the basis of the4-page profile.
Conversely, above a level in the region ofUS$250,000 – depending upon the complexity ofthe project as much as upon the value of theinvestment – it may be wiser to supplement, oreven replace, the use of RuralInvest with aspecialized project formulation team. This isimportant because RuralInvest is designed largelyto be used by general technical staff, while abovea certain investment cost it becomes worthwhileto contract specialists in a number of fields.
RuralInvest, therefore, is best used for small andmedium scale projects that run from perhapsUS$5,000 to somewhere not greatly exceedingUS$250,000, always depending greatly on thecomplexity of the project design.
D. The RuralInvest Modules
As mentioned above, RuralInvest covers a series ofphases or modules. The following is a descriptionof the principal elements of each of them.
Module 1 – Participatory Identification ofLocal Investment Priorities
The first module of RuralInvest is primarilycommunity focused, particularly through itssupport for the creation of a local developmentplan from which the specific investment projectswill derive. Communities and groups which alreadyhave undertaken this type of process, or individualapplicants who are generally much clearer on theirpriorities, may wish to pass directly to Phase Ibwhere the project profiles are developed.
RuralInvest provides detailed guidelines in thisphase to help in the following tasks:
a) Define the current situation of the group orcommunity, taking into account a range ofaspects, including physical (the location ofthe community, availability of land andwater, types of soils, slopes, etc.)environmental (forests, fishery, rainfalldistribution), and socio-economic andcultural (availability of markets, currentearnings of members of the community,migration, group solidarity, etc.);
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b) Use this definition of the current situation toreach agreement on key problems andpotentials faced by the community or group;
c) Develop a local development plan thatdefines priorities for action according to theneeds of the applicants;
d) Identify one or more possible broadinvestments that would contribute tocarrying out and achieving this plan.
For communities, this first phase almost alwaysrequires the support of a community worker orrural technician, trained in the use of RuralInvestand with experience in participatory planning.The technician will support and guide theapplicants in using the tools and guidelinesprovided by RuralInvest. Ideally, she or he willalready know the community, through residenceor previous work in the area, but in many casestechnicians will be assigned to work with theapplicants by the supporting agency as the resultof a specific request from the community.
Where there has been no prior contact betweenthe technician and the applicants, and a localdevelopment plan or its equivalent has never beenprepared, the diagnosis and identification phasemay require the technician to make a series ofvisits over a period of as long as three to fourmonths, depending on the degree of organizationof the group, the complexity of the constraintsand opportunities faced, and the accessibility ofthe community.
Where the community has previous experience inidentifying local requirements and priorities, theprocess will be much more rapid, and the phasecan often be completed after no more than a fewvisits.
In this first phase there is generally no need forspecialized technical staff to participate, as thepriorities and resulting development plan shouldlargely be the work of the applicants themselves.
Module 2 – Creating and Using Project Profiles
The core of Module 2 is the preparation of aproject profile for each priority investmentproposal. These profiles provide enoughinformation about the investment to allow boththe applicant(s) and the eventual financing sourceto see which ideas have potential, and are thusworth the further effort and resources required todevelop them in detail.
Most individual applicants will seek to by-pass theearlier community diagnosis and planningactivities, which are often of little relevance forthose who already have a clear idea of whatinvestment they seek to make. Even wholecommunities which have previously undertaken
some form of community development planningmay wish to pass directly to profile preparation, aslong as there is already a broad communityagreement on development needs and priorities.
Few, if any applicants, however, should bepermitted to jump directly to Module 3 ofRuralInvest, as the resources required for detailedproject development can not easily be justifiedunless a profile has already been approved. Inaddition, the profiles also provide considerableinformation that can be incorporated directly intothe Module 3 models, so little work is lost in firstpreparing them.
Unlike Module 1, the local field technician mayneed to be supported during profile preparationby a subject-matter specialist. Where theproposed project involves an area for which littlelocal knowledge exists (e.g. solar electricitygeneration for lighting), a specialist will berequired who can provide key parametersconcerning cost and performance, so as to avoidextensive work on a proposal that is clearlytechnically infeasible from the start.
Module 3 – Detailed Formulation andEvaluation
The second phase of RuralInvest consists ofpreparing a more detailed project proposal, usingthe Module 2 profile as the starting point.Participants in this phase may include not onlythe applicants and the local technician(community promoter, extensionist, etc.), butalso a regional technician, trained in the use ofthe computerized RuralInvest models for projectformulation and analysis. It is possible that thelocal technician assumes this function. Generallyspeaking however, the two roles are sufficientlydifferent that a separation of responsibilities isrequired.
In the detailed project preparation stageadditional external technical input may also berequired, depending on the investment value andits complexity. External input may be needed fromspecialists in such areas as: environmental impactanalysis; irrigation engineering; food processing,etc. Generally, however, their input is short,requiring no more than a few days to a week, inline with the value of the investment proposed.
The depth and level of detail required in theprocess of formulation and evaluation will dependon the complexity and the scope of the project.The regional technician will provide support to theapplicants and to the local technician in some orall of the following tasks:
c Determination of demand and benefits;
c Evaluation of the proposal’s technicalfeasibility and scale;
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c Assessment of the project’s operationalsustainability, both in financial and inenvironmental terms;
c Determination of the detailed costs of theinvestment and its subsequent operation;
c Selection and specification of an appropriatemanagement and administrative structure;
c Estimation of sources and costs of financing;
The process of formulation and evaluationrequires the use of a computer and is not generallycarried out in the field. For this reason it isessential that contact be maintained between theresponsible technician and the applicant(s) toinsure that the proposal truly reflects their needs.Furthermore, it may be that the detailedformulation reveals aspects of the investment thatrequire the applicants to reconsider their plans (forexample, competition for labour at key periods ofthe year, or high maintenance costs).
Depending on the degree of complexity of theproject, it is estimated that the detailed evaluationwill require between two and four weeks per profileand will call for several visits to the field by thetechnician working with the computer software.
Module 4 – Monitoring and Evaluation ofProjects
Many institutions or internationally-financed projectsadopting Ruralinvest support the preparation andfinancing of scores, or even hundreds, of ruralinvestments. Furthermore, the process of identifyingand preparing these investments is often undertakenin a number of local offices spread throughout thearea covered. In these circumstances, adequatelymonitoring and evaluating the proposals receivedcan be a difficult task.
As a result, a fourth module has been developedto provide organizations using RuralInvest withassistance in monitoring and evaluating allinvestment projects prepared using the system. Tomeet the monitoring requirements, a searchengine capability has been built into theRuralInvest software. The search engine canrapidly identify and provide key data on allprojects entered into the computer. In addition, allprojects are now ‘tagged’ in order to track theirprogress through the project cycle and permit acomparison of initial proposals with later resultsfor evaluation purposes. Each of these functions isdescribed briefly below:
Monitoring Data on Project Characteristics
Using a number of key indicators defined in everydetailed project proposal (for example type ofinvestment, location, total investment, employment
generation, type of beneficiary) it is possible to usethe built-in search engine function in the software toidentify all projects stored in that computer whichmeet selected criteria. These criteria can define thelocation or status of the project, its type, beneficiaryor environmental category or the technician whoprepared it. Key financial indicators can also beselected for, such as internal rate of return, netpresent value, total investment cost or the use ofdonated resources. For example, by selecting theindicators ‘northern field office’, ‘beneficiary groupwomen’ and ‘small livestock’, a table would begenerated that showed all projects meeting thesecriteria and their key characteristics.
Monitoring Data on Project Performance
Proposals and subsequent projects prepared usingRuralInvest can also be labelled according to oneof the following stages in the project cycle:
c Proposal
c Approved for financing
c Investment
c Operation
The indicators described above can then be usedto classify projects at different stages in the projectcycle. Furthermore, by entering new data intoprojects as they move from one project stage tothe next, it is possible to evaluate the projects incomparison with earlier stages. For example,entering data on such elements as actual yields,prices or quantities sold once the project isunderway allows returns, employment generationand other measures of project performance to bere-calculated automatically, and hence easilycompared with original projections.
E. RuralInvest Users
RuralInvest is potentially useful for any group,organization or individual that wishes to elaboratean investment proposal that adequately takes intoconsideration all of the key elements in theidentification, formulation and evaluation of aproject. However, taking full advantage of thedifferent tools offered by RuralInvest requires: (a)training in the RuralInvest methodology and tools,and; (b) access to investment and working capitalin order to finance the selected projects.Experience has shown that RuralInvest is thusmost applicable in contexts such as:
c An agricultural or rural development fundmanaged by a regional development project,a Ministry of Agriculture, or even an NGO;
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c A Demand-driven Rural Investment Fund(DRIF) or Community Development Fund(CDF), as promoted by the World Bank andother international agencies;
c An environmental and biodiversityprotection program or one aimed at thereducing the impact of natural disasters,such as are supported by the GlobalEnvironment facility (GEF) and otheragencies.
c As a loan analysis and evaluation tool for useby private and parastatal banks withextensive operations in the rural sector.
c In the ex-post evaluation by Governmentsand international agencies of the impactand profitability of rural investments oncethey have been implemented.
With respect to training, although it is notnecessary that the assisting local technicians beexperts in financial matters or economic analysis,there are certain minimum requirements for thekey positions of local technician and of regionaltechnician:
Local Technician or Community Worker
c Experience as organizer or facilitator of ruralcommunities or groups of producers.
c A basic understanding of the concept of aproject.
c The ability to communicate with ruralindividuals or groups.
c Experience in one or more of agriculturalproduction, rural infrastructure and smallenterprises.
Regional or Support Technician
c Professional qualification, such as:agronomist, economist, administrator,engineer or other similar profession.
c Basic knowledge of rural productionsystems.
c Prior experience in the use of computersand MS Windows.
c Familiarity with the basic financial concepts.
c Participation in the first training course forfield technicians.
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Chapter II
THE DETAILED FORMULATION ANDEVALUATION PHASE
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repairs and machinery replacement and thepossibility of alternate technologies is alsoconsidered.
3. Sustainability and environmental impact:This task considers the sustainability of theproject not only from the perspective ofnatural resource usage and environmentalimpact. It is also critical for those projects notgenerating substantial income streams,where there is a need for operational supportonce the investment is completed: a school isnot sustainable if there is no provision forpaying the teacher’s salary. For investmentswith the likelihood of a negativeenvironmental impact, impact mitigationmeasures, or ways to modify the projectdesign to avoid these impacts, must beidentified.
4. Estimation of costs and income:The next step is to define and calculate thecosts and income associated with theinvestment and operation of the project.Although this may be a relatively easy stepfor simple investments, the introduction ofvariables such as perennial crops, livestockbreeding or other complex activities cancreate significant complications.
5. Financing the investment:With costs and income calculated, thefinancing needs can be considered, both forinvestments and for the working capitalneeded for daily operations.
6. Organization and investmentmanagement:The most profitable project will fail if it lacks anadequate structure for directing andmanaging operations. The identification ofthese management needs is an integralelement in the formulation and evaluationeffort.
7. Evaluation and preparation ofrecommendations:With all the individual elements offormulation and evaluation gathered, the fullproject evaluation can be undertaken.However, the results obtained only tell part ofthe story. It is also necessary to identify thekey factors that will influence the eventualsuccess of the investment and to determinethe risk that these factors may differ fromthose foreseen in the project design,affecting the success of the project.
8. Preparation for the investment:Aspects to be considered here are: taskscheduling, negotiations with the financingsources, supervision of construction and otheractivities essential to the execution of theproject.
II THE DETAILEDFORMULATION ANDEVALUATION PHASE
This guide provides a detailed description of themethodology and procedures involved in the
third phase of RuralInvest; that is, the phase offormulation and evaluation of detailed projects.Two prior modules exist offering similar supportfor the tasks of diagnosis and identification(Module 1) and the preparation of project profiles(Module 2). Each module is provided with atechnical manual and an instructor’s guide.
Normally, it is recommended that formulationand evaluation be carried out only after thecorresponding Module 1 and 2 field work hasbeen completed. However, Phase I(corresponding to Module I) may not always benecessary, and where the proposal is derived froma single family or individual, or in those caseswhere it is clear that the proposal represents thewishes and priorities of the applicants, it may bepossible commence with Module 2.
The manual also highlights the importance ofsupporting the process that follows formulationand evaluation. Even once the financial committeeof the supporting agency has approved theinvestment proposal, there remain manychallenges to be faced by the applicants beforethey can initiate the project. It is hoped that theseneeds will be considered in greater detail in aproposed latter manual, which is to focus on theexecution of small rural projects.
A. Main Elements of Formulation andEvaluation
The formulation and evaluation phase comprisesseven main elements, described below:
1. Estimation of demand and benefits: Thistask determines the potential benefits thatresult from the investment. In projects thatgenerate saleable products, the size andnature of market demand is estimated. In thecase of non-income generating projects, thebeneficiaries must be identified and theimpact of the investment on thosebeneficiaries estimated. In both cases, theexercise helps define the scope of theinvestment and its characteristics.
2. Evaluation of the technology: Theproposed technology is reviewed in light ofthe results of the evaluation of demand andbenefits, in order to ensure that it isappropriate. The need for maintenance,
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B. Software Scope and Requirements
Given the custom software developed forRuralInvest, it is not necessary for users to becomputer experts. However, access to a relativelymodern computer and some level of familiaritywith the Microsoft Windows operating system areindispensable. The use of a computer with aminimum of Microsoft Windows 95 (or laterversion) is recommended whenever possible.
Two principal types of operations are permitted bythe software, the entry of project profiles(prepared in the field during Phase II) and theformulation of detailed project proposals.Electronic versions of the profiles can be used formanagement information purposes and can besorted by key characteristics. They can also passbasic information automatically to the screensused for detailed formulation.
The detailed formulation option within thesoftware permits automatic calculation of many ofthe steps necessary in the determination of projectfeasibility. Different screens exist for incomegenerating and non-income generatinginvestments. Once all required screens have beencompleted the software can generate projectsummaries or full project descriptions of between8-25 pages, depending on the scale andcomplexity of the project. Information can also bepassed from a computer in a local office or agencyto a central headquarters, where projectsprepared by different technicians can be groupedtogether. It is hoped that there will shortly besupplementary software available to permit theManagement Information Systems (MIS)department of a Ministry, bank or large project tooutput detailed breakdowns of rural investmentproposals by location and type of investment.
Finally, by subsequently replacing data used in theproject models with real data once projects are inimplementation, RuralInvest permits users to seeclearly the differences between the project asenvisaged when in preparation, and the project asit occurred in the real world. This comparison canbe invaluable in helping to identify weaknesses inthe project formulation process, and showingwhere more conservative assumptions or moredetailed analysis, are necessary.
The computer software currently used byRuralInvest is largely developed in Microsoft VisualBasic with database functions derived from MSAccess, and conforms to the structure used for theMS Windows Explorer package, which is found inall Windows desktops. While Windows is essentialto run the RuralInvest package, there is no needfor the user to have MS Access on his or hercomputer, as the package is self-executing (that isto say it carries its own programming code). AUser’s Manual provides additional support for the
software, but the menu-driven structure and on-screen help renders the software easy to use oncethe underlying concepts have been understood(the key role of the training course).
The software offers two levels of entry, includinguser and administrator. Those with administrator-level access can modify a number of data entryparameters and output screens to meet thespecific conditions of the country or institutionsupporting RuralInvest. For example, it is possibleto define default currencies, administrative levels(e.g. municipalities, districts, provinces, states,etc.), regional or local offices, and projectcategories. It is also possible to set defaults for thefinancing aspects related to the investments, suchas minimum and maximum duration of loans, theavailability of grace periods, interest rates etc.
C. A Brief Warning
RuralInvest cannot work miracles. The quality andvalue of the final proposal generated as a result ofusing RuralInvest depends, to a large extent, onthe care and thoroughness with which thedifferent stages of analysis have been completed.Poor information entered will result in poor resultsgenerated at the end of the process.
In some cases, specialized information is neededto determine such aspects as marketcharacteristics, probable yields or the suitability ofthe zone for the proposed crop or product. It istherefore recommended that when a proposaldeals with a matter involving information thatgoes beyond the knowledge or capability of thegroup and its advisor (for example, determining ifthe flow of a stream is sufficient to support anirrigation system of a determined size), theopinion and support of experts in the particularfield should be sought. Organizations andagencies using RuralInvest should make allowancefor the cost of such supplemental technical inputand it can be vital for project integrity.
Of even greater importance is the treatment ofmuch more common figures: yields, prices andcosts. The computer software used in RuralInvesthas only a very limited ability to identify and rejectincorrect or over-optimistic numbers. Anyproposal can appear attractive if the technicianinserts very optimistic numbers into theformulation process and if she/he fails to give thenecessary importance to such integral evaluationsas marketing, technology, sustainability,management, etc., and treats them asunimportant tasks to be completed as quickly aspossible. If the technician states that cheese fromthe dairy plant will sell for US$2.50/kilo when arealistic price is closer to US$1.25, the result islikely to be an apparently attractive project that
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fails once it is put into effect. For this reason it isvery important: (a) to not inflate figures togenerate positive outcomes, simply because thefirst numbers used did not give the desired result,and; (b) identify those elements which are mostlikely to affect the overall feasibility of the project(yields, prices etc.) and use the power of thecomputer to run the model various times underdifferent assumptions. This will soon show which
changes could result in a failure of the project (thisis discussed in more detail in Chapter 8 of thismanual).
Remember: The recommendations that youpresent to the financing agency may have aprofound impact on the lives of the applicants. Ifyou fail to do your job properly, many lives can beadversely affected.
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Chapter III
ESTIMATING DEMANDAND BENEFITS
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money generated to continue operations andcover the cost of the investment.
The evaluation of demand (existing or potential)for a proposed product or service must thereforebe the first step in determining whether aninvestment is feasible or not.
The evaluation of demand not only determinesthe general feasibility of the investment andoften the scale of output, it may also have animportant impact on the characteristics of theproduct to be generated, the technologyapplied; the inputs that can be used (forexample, certain types of agrochemicals); andthe scheduling of activities. Consequently, anyinvestment proposal that fails to present anexplicit examination of the market is, bydefinition, inadequate.
The tasks involved in evaluating market demandvary, depending on the type of product or serviceunder consideration. Four main categories ofgoods and services can be identified, each ofwhich has its own features, and requires adifferent approach to demand evaluation. Thesecategories are:
a) Basic non-perishable products
b) Basic perishable products
c) Innovative or specialized products
d) Services.
Each of these categories is discussed in more detailbelow:
1. Basic Non-perishable Products
This is the simplest category of products in termsof evaluation. The key characteristics of basic non-perishable products are as follows:
a) They have well established and developedmarkets with multiple points of sale andpurchase. That is to say, it is easy to find bothbuyers and sellers, and there are standardprices – often publicly available – for theproducts.
b) They suffer no rapid deterioration in qualityafter harvest or production, and thus anyproduct not sold today may be soldtomorrow with little or no loss of quality. Asa result, storage is relatively easy and pricesnormally change only slowly from month tomonth.
c) Price variations within a single marketgenerally reflect widely recognizedcharacteristics of the product (size, colour,variety, quality, etc.) and there is little or nodistinction made as to the source of theproducts. Specific, sometimes legally-
III ESTIMATING DEMANDAND BENEFITS
The starting point for assessing any projectmust be the identification of demand and
benefits. An understanding of these factors iscritical because they determine whether theinvestment will be of value – either becausepeople want to buy the output, in the case ofincome generating projects, or because theinvestment contributes to the quality of their lives,in the case of social, environmental and supportprojects. In particular, the level of demanddefines the scale of the investment (andconsequently, the volume of production and theoperating costs), as well as many othercharacteristics (e.g. technology, ingredients,seasonality) that will be discussed in more detaillater.
The method of estimating demand will varyaccording to the product or service being offered.The simplest case is that of non-perishableproducts with widespread demand (such as rice,wheat and maize), but we will also look atdetermining the demand for perishable,specialized or innovative products, as well as forservices. We will also briefly address the costsassociated with marketing the good or serviceproduced.
Even projects that do not result in saleable goodsor services are still dependent on demand. What isthe purpose of constructing a school if there areno children to fill it? Demand may not beexpressed in money terms, as it would be for a kiloof cheese, or a shirt, but it definitely must exist. Insuch cases the challenge is to identify who theusers or beneficiaries might be, and whatalternatives they have. Sometimes it may even benecessary to estimate the value of the benefits thatusers receive.
A. Estimating Demand in the Presenceof Markets
The market is critical for any investment that ismade with the intention of generating incomeand profits. Where a product or service is to besold, the amount that people will buy is themeasure of demand for that product. No incomegenerating project can sustain itself if it fails torespond to the demands of the market. Thismeans that when producing a product or serviceand delivering it to the buyer, the project mustfulfil the characteristics that the buyers are lookingfor, in terms of volume, price, packaging, quality,and seasonality of supply, among other factors. Ifthis is done, the product or service will be sold and
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established grades often exist that render iteasy to see how quality and othercharacteristics affect prices: for example, nomore than 5% broken grains.
Although the concept of "non-perishable" dependson the length of time being considered, this groupcan include: grains, roots and legumes; many ofthe traditional export products (coffee, cocoa,sugar, cotton, etc.); and some manufacturedproducts, where there is little difference from onesource to another, such as simple tools andagricultural inputs or construction materials(blocks, roofing tiles, etc.). Live animals may alsobe counted in this category, as there are generallywell developed markets for poultry, pigs and cattle,and they are not perishable, in the sense of losingquality from one day to another.
The factors that characterize this category carrythree important implications: (i) the market canabsorb as much as a small or medium project iscapable of producing, and therefore there is noconcern about the scale of the investment from amarket point of view; (ii) the price of the productis easy to ascertain and will not be influenced bythe activities of the project; and (iii) thespecifications of the product are generally wellestablished (for example, the percentage ofhumidity in grain, or the size of a building block).
The only exception to this last rule is if a projectdecides intentionally to offer a basic productunder new specifications (for example aconstruction block of a new size). However, theproduct would then no longer fit in this category,but would have to be analysed as an innovative orspecialized product (see section below).
Market evaluations for basic non-perishableproducts are among the simplest to perform. Anyconcerns about the market would probably focuson price trends over the next few years, aschanges in national or even internationalproduction, tariff barriers and technologies mayresult in substantial price shifts in the future.However, forecasts for future prices can frequentlybe found in publications, bulletins or the databases of national public institutions orinternational agencies.
Although the market evaluation is typically verysimple, it is still necessary to keep certain keypoints in mind, especially when dealing withprocessed foodstuffs;
c The selected price should be justified in thecontext of medium range tendencies, ratherthan based on its price during the week inwhich the market evaluation was carried out.
c Make certain that there is a clearunderstanding of the characteristics that themarket demands of the product; a small
difference in size, colour or humiditycontent can render a product unattractiveto potential buyers. Remember: When thereis not much difference between products, itdoesn’t take a very important fault to leadthe buyer to choose a different one.
c If retail outlets, supermarkets or other sellersare going to be used to sell the product,don’t forget the margin they charge fortheir service. Jewellery is frequently sold atmargins of up to 100% or more and evenfood products can expect margins of 30 to50%. Identify your distributors as part of themarket evaluation if possible, and negotiatemargins ahead of time.
2. Basic Perishable Products
Although basic perishable products also face wellestablished markets with many buyers and sellers,they differ from the previous category in one keyaspect; the product loses quality rapidly over time.And what a difference that makes to demandevaluation! A market evaluation for perishableproducts faces problems that are very differentfrom those of non-perishable products. Due to thefact that perishable products are delicate and havea short life once harvested or produced, theirmarkets (although typically widespread andactive) are often characterized by variable suppliesand strong price fluctuations. Such conditionsmake it very easy to over- estimate the potentialincome from the sale of these products.
Among the products found in this category are mostfresh vegetables and fruits, fresh seafood, cut flowersand some processed and semi-processed foodstuffssuch as bakery goods, fresh juice, milk, etc.
Some of the most important factors that arefrequently overlooked in the market evaluation ofperishable products are:
a) Losses suffered by the product duringharvest, packing, transportation, andmarketing can be appreciable. In some casesit is possible to end up selling less than 50%of the volume produced, and losses of 25 to30% are not uncommon.
b) It is also common to find that the price in oneweek can be double (or half) the price of theprevious week. For perishable products it ispossible that the price changes in the courseof a single day. These fluctuations can resultfrom changes in demand, but are mostfrequently the product of changes in supply.If the product is delivered to market whensupply is tight prices may be very high. Bycontrast, delivering to market when theproduct is abundant may yield only very lowprices.
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c) Unlike grain or roofing tiles, it is often difficultto keep a perishable product from one day tothe next; in the extreme cases, a product thatis not sold by the end of the day or week maynot only loose all of its value, but also causeadditional costs for garbage collection.
It is not surprising, then, that fluctuations insupply and price have a strong influence on thesuccess or failure of a project that generates aperishable product. The extreme variability thataffects the prices of perishable products demandsexceptional care in estimating the average saleprice (see the example presented in the box).
We recommend that when evaluating the marketfor perishable products, the following factors begiven serious consideration:
c Relatively small quantities of perishableproducts can cause large fluctuations in theprices, especially in small markets. Talk tosellers and other market participants todetermine the volumes passing throughyour selected market and the seasonality ofsupply. If your product would addsignificantly to these volumes, consider thefeasibility of delivery at periods of shortsupply, or try and supply to more than onemarket.
c High prices can result from unexpectedshort-term conditions; check the pricehistory over several years, if possible.Remember; high prices often attract otherinvestors, resulting in more production andlower prices in the future.
c Be realistic about the physical losses thatmight be encountered. If the product isdelicate, a minimum of 20–30% should beassumed, unless experience shows a way toreduce this figure. Sturdy products mightsuffer loses of 10-15%.
c Perishable products that are produced yearround, such as eggs, milk and bread tend tosuffer less price instability because supply isfairly constant. Even so, demand may vary,causing losses at the end of a day if thereare too few buyers.
Consider the possibility of negotiating fixedcontracts with consumers (agroindustries,restaurants, hospitals, etc.), who offer a guaranteedmarket, even if you have to accept a lower price.
3. Innovative or Specialized Products
In the two previous sections we considered thedifferences between perishable products and non-perishable products. But in both cases we dealtwith standard products where, from the
consumer’s point of view, there is not muchdifference between the outputs of farm or plant"X" compared with that of farm or plant "Y".However, when dealing with innovative orspecialized products, the situation changesdrastically.
Innovative products (by definition) have noexisting market price, as they are new, but it may
The world is full of failed tomato productionprojects. Why? Because whenever anyonemakes a calculation of its profitability, thetomato shines forth as fabulously profitable.Enormous earnings await those who are willingto invest in establishing just a few hectares ofthis golden vine.
Look, say the investors, the Ministry ofAgriculture assures us that we can easily obtainyields of 6.5 tons of tomatoes per hectare, at acost of no more than $2,750/ha. Last year, theprice of tomatoes in the local market frequentlysurpassed $1.50/kg. Sometimes it got as highas $2.50! Taking the conservative figure of$1.50 would mean an income of $9,750/ha. or$7,000 profit after costs for every hectare. Wecan invest $50,000 in an irrigation system, asmall building for selection and packing, andthe equipment needed for cultivating 5 ha ofland. We will make $35,000 in profits in thefirst year and we will have paid off the loan inless than two years. What an opportunity!!!!
The reality, however, turns out to be a littledifferent. Luckily, there are no serious pest orinsect problems in the first year, and theinvestors manage to harvest 6.25 tons/ha; closeto the promised yield. But they lose 8% of thecrop in the selection and packing stage, andanother 15% in transporting the tomatoes tothe closest market. With a supply of 24 tonsbeing harvested in a period of just a few weeks,the local market is flooded with tomatoes. Afterwatching the initial price drop from $1.80 to$0.50/kg. and still having unsold tomatoes atthe end of the day, they decide to contracttransportation at a cost of $0.40/kg to take theremaining tomatoes to the regional market.There the price is a little better, but they still getno more than $1.20/kg. and they sufferanother 10% losses thanks to the poorcondition of the road.
In the end, the investors managed to sell anaverage of only 4 tons/ha at an average price of$0.60/kg (after transport costs). Their totalincome from each hectare has fallen to $2,400.They are loosing $350 per every hectareplanted. What a disaster!!!!
THE SEDUCTIVE TOMATO
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be possible to determine likely prices by looking atthe price of competing products, or by looking atthe price relationship in markets where theproduct does exist. An exotic fruit, for example,might be unknown in your market, but be sold ata price slightly more than an apple in the capitalcity. A word of caution here: If the product isknown elsewhere, but not sold in your localmarket(s), ask yourself - why not? You may havehit upon an unexploited market opportunity, butmaybe not. It may be instead that the buyers inyour area simply do not have the income to affordsuch a product, or that it does not fit easily withthe food and eating habits of the area.
Specialized products might include products withlimited sales (where there are not manycompetitors because of the small size of themarket), or they could be products with quitesubstantial markets, but where – in contrast tobasic products - the buyers see importantdifferences in taste, quality, or durability betweenthe competing products. Specialized productscould take the form of a jam, a shirt or even a car.
If you manufacture a car, you cannot simplysuppose that you can put the same price on it ason a Toyota, and sell as many as you want. In factit could be that you don’t sell many even at halfthe price of a Toyota, because, as far as theconsumer is concerned, your car and the Toyotaare not the same.
This characteristic means that the marketevaluation must not only determine the level ofdemand, the price and the seasonal sensitivity ofthe product (as in the case of basic products), butalso the nature of the product that is in demand.The market defines the product.
A shirt can have long or short sleeves, it can bewhite, blue or yellow, and it can have four or sixbuttons. In other words, every shirt is different,and a buyer looking for a formal shirt may not buya sports shirt.
Products that will likely fall into the category ofspecialized products include: handicrafts (wooden,cloth or ceramic articles etc.); clothing; many
The importance of packaging to a processed product can be illustrated by these true stories of waysin which the packaging affected the fortunes of a food product.
The PrincessA group of women in Guatemala were using an abundant local supply of pears to prepare juice,packaging it in small "easy-open" cans, each with enough juice for one person. But the product hadto compete with a range of juices from a large national processor already well established in themarket. Sales of the local product were poor. Finally, the women decided that their problem arosefrom not offering a wide enough range of flavours. With the help of an NGO, they brought in fruitfrom other regions to process and thus increase the range of their products. But their problems onlygot worse; now they had cans of pear, pineapple and mango juice that would not sell. What to do?
Their real problem was the cost of the packaging. The fancy cans made up 80% of the totalproduction cost, and their initial advantage - access to local fruits at low costs – was completely lost.They simply couldn’t compete with the low-cost paper "tetrapaks" used by the large corporation. Thesolution lay in using a package more suited to the local market. Plastic bags, such as those used formilk and cream, allowed the group to sell larger quantities at reduced prices and thereby meet thedemand of lower income buyers in the area.
The CinderellaA small fruit processing plant in the Caribbean had a problem. It was hand making a guava jelly andselling it in simple glass jars in the local supermarket at $0.99 each. Unfortunately, Kraft Foods alsohad a guava jelly, and was offering it at the same price. Thanks to its famous trademark, Kraftmanaged to capture the lion’s share of the market, and the local plant couldn’t sell enough of theproduct to cover its costs. What to do?
A closer examination revealed that the fruit used by the processing plant came from a wild guavaforest in the middle of the island. The trees had never been sprayed with chemicals or received anyfertilizers. Here was an opportunity - but only if the product could be presented in the right way. Withthe help of a designer, the cheap packaging was replaced with an octagonal glass jar complete withsatin ribbon and an elegant label. Instead of "Guava Jelly" the label now read "Sea Island Wild GuavaPreserve. Hand-made with 100% organic wild tropical fruit." The newly packaged jelly was soldthrough a chain of luxury stores in the USA at over $4.00 each, and the plant received enough perjar to cover the additional cost of the packaging and to increase its profit margin. Now its problembecame finding enough raw material to fill its demand!
A TALE OF TWO PACKAGES
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processed foodstuffs (but not all; few consumersmay readily distinguish between competing brandsof milk); many fruits, vegetables and exoticproducts; and any innovative product (for example,construction materials, furniture, etc.)
Unless you are lucky enough to find a person withconsiderable experience in marketing the productin question, it might be necessary to carry outsome sort of a market study:
c What is the characteristic of the productthat will attract the attention of theconsumer? Could it be the price, the quality,the origin, or an element of novelty in itsappearance or content? Regardless, everyproduct must offer something for theconsumer and the first step in the marketevaluation must be to identify thatcharacteristic.
c What kind of person or client will be mostlikely to buy this product? If it is somethingout of the ordinary (an exotic fruit orvegetable), perhaps a luxury restaurantwould be interested. But in this case itmight not be advisable to offer the productin a poor neighbourhood.
c What marketing channel will be used? If theplan is to sell the product through a store,supermarket or other salesperson, you mustbe sure that they will accept the productand you must determine the profit marginthey will charge. If you intend to sell theproduct directly, in a market or fair, youmust identify the most adequate point ofsale, based on the target consumer.
Keep in mind:
c In the case of processed products, thepackaging is critical. However, even thoughthe market demands attractive packaging,remember that what you are selling is the
product, not the package. Therefore, makesure the packaging used is appropriate forthe market.
c Generally, processed foodstuffs must complywith legal standards regarding labels (list ofingredients, health permit numbers, etc.).Establish those requisites as part of a marketevaluation.
On the previous page two brief stories arepresented (see box) that illustrate the importanceof appropriate packaging for each product.
4. Services
The evaluation of demand and marketcharacteristics for services raises issues that arequite different from for products. Services arecrucially characterized by the transitory nature oftheir supply. A hotel that only fills 60 of its 100rooms on one night cannot recuperate its losseson the next night by offering 140 rooms.
Each time a service is offered and there is nobuyer, that income is lost forever. The same,however, cannot be said for the costs. Normally, aservice company will incur costs whether there areclients or not (although costs may be higher whenthere is work).
As a result, the critical element in the evaluation ofthe market for a service consists in establishing thepattern of demand for services over the span of ayear (or other period). Although some services(e.g. well digging or transportation) may have amore balanced demand pattern than others (i.e.hotels, agricultural services), it is not sufficient toassume a constant demand for any service, everyweek or month of the year. In the followingexample, it can be seen that the demand for theservices of a tractor varies greatly according to theagricultural cycle; of an estimated 50 hours permonth in January, April, September and October,
Jan
50
10
500
Feb
190
20
3800
Mar
190
20
3800
Apr
50
10
500
May
90
15
1350
Jun
90
15
1350
Jul
160
20
3200
Aug
160
20
3200
Sept
50
10
500
Oct
50
10
500
Nov
85
15
1275
Dic
85
15
1275
Land Prepn.1st Cycle
Harvest2nd Cycle
Land Prepn.2nd Cycle
Harvest1st Cycle
Estimate of Annual Use of Tractor Services (Hours / Month)
Hours/Month
Rate/Hour
Income/Month
Annual total (Hours): 1250 Annual total (Income): 21250
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to 190 in February and March, when preparationof the fields is in full swing.
If you anticipate that the demand is going to varygreatly, there are several available options: One isto charge a variable price for the service, topromote the volume in periods of low demand.Hotels, for example, frequently charge reducedrates for rooms during the "off" season comparedwith "high" season rates. In the example shown, acontractor selling tractor service offers three rates:$10/hour during the slackest period; $15/hourduring the harvest; and $20/hr during the soilpreparation period, when the demand isstrongest. Remember: once the day (or night) haspassed, the available service is worth nothing; theopportunity is gone.
5. Marketing Costs
Finally, it is important to bear in mind, as part ofthe market evaluation, the costs associated withthe selling process. As we saw in the tomatoexample, these costs can have an importantimpact on an operation.
Among the types of costs to be considered are:
c The cost of packaging the product,including: the container (bag, bottle, jar,box, etc.); the label, and materials forprotection during transportation (e.g.cartons for tins, wooden boxes for glassjars);
c Transportation costs from the point ofproduction to the point of sale;
c Costs of distribution and representation(when the product is sold through adistributor or agent);
c The sales margin of the store or other pointof sale (when using the final retail price asyour base for calculation);
It is useful to remember that some sellers mayinsist on a policy of "sell or return" or sale onconsignment, in which they only pay theproducer when the product has actually beensold. This method is very common withhandicrafts, such as paintings, jewellery or otherworks of art. It is also frequently used with newproducts, when the seller cannot easily calculatethe level of demand. It is not a very attractivearrangement for the producer, but it may be theonly way to begin the marketing process.Nevertheless, remember: products deliveredunder this system are not yet sold, and you haveto be careful when starting a new round ofproduction, based on these deliveries; they mightend up being returned by the store.
B. Estimating Demand in the Absenceof a Market
We have seen in the preceding section that thereliable determination of demand levels and pricescan be difficult. However, in the absence ofmarkets for the products generated by theinvestment, the estimation of the demand is evenmore complex. When a product is sold, you cansay that the buyers of that product are its clientsor beneficiaries, and the demand corresponds tothe number of products sold to them. Of evengreater importance is that it may be assumed thatthe market will give a clear indication of the valueof the product, thereby facilitating the estimationof benefits2. But if the product is something likethe protection of an ecosystem or a campaign forvaccinating children, then who are thebeneficiaries? What is the level of demand? Whatvalue can be assigned to the products or servicesgenerated?
This problem is encountered by everyone whodesigns and finances investment projects whichgenerate benefits without direct consumermarkets, such as roads, health care centres,reforestation, etc. Many documents on the subjecthave been written, proposing complexmethodologies for resolving these questions.
Of course, when we are dealing with US$10,000or US$100,000 projects we cannot go into thesame detail as for a project aimed at rehabilitatingthe national healthcare system, with a budget thatmay well exceed US$100 million. But, even whenpreparing small projects, it is necessary at theminimum, to determine and estimate the level ofdemand and benefits expected from theinvestment.
1. Who are the beneficiaries and how manyof them are there?
Before considering the level of demand, it isnecessary to first determine who the beneficiariesare. In some cases the answer can be clear; thebeneficiaries of a healthcare centre are those whogo there to seek medical attention. But it is notnecessarily that easy. Should we exclude thepeople that live in the zone but have no need forthe services in a given year? Perhaps they arebeneficiaries, simply because they enjoy theavailability of the facilities, even though they havenot had recent occasion to use them.
Experience has shown that when a rural accessroad is constructed or improved, one of thegreatest resulting impacts is an increase inagricultural production. In addition to facilitatingthe transportation of products to markets outsidethe zone, a road also allows for delivering input
2 In reality there are many factors that can distort the price paid in the market for the products, such as taxes, quotas, etc.
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materials, and for the access of extensionpersonnel to the zone. It may also help children toreach schools and the sick to reach medical care.Thus the beneficiaries are by no means restrictedsimply to those who drive the trucks and buses onthe road; the most important beneficiaries arerather those who live and work nearby.
In some cases, it can be argued that the wholecountry, and indeed the entire world can beconsidered as a beneficiary. This is the logic thatsupports a new type of project, in which richcountries that generate vast quantities of carbongases (coming from factories and other industrialactivities), pay less developed countries to protectand increase their forested areas, where thosegases are converted to wood and other organicmaterials by the trees and other vegetation. In thisway the beneficiaries of these projects includepeople who live in distant continents.
Such great impacts are not to be expected from asmall project. However, projects involvinginfrastructure and conservation of naturalresources frequently benefit people living outsidethe zone. For example, a project for the protectionand conservation of mangrove swamps maybenefit the shrimp producers (because shrimplarvae live in mangrove swamps), the tourismsector (because mangrove swamps house aplethora of wildlife), and the agriculturalproducers of the region (because the mangroveswamps act as a buffer zone to protect agriculturalzones from storms, erosion etc.).
In order to overcome the problem of direct andindirect beneficiaries, and at the same time, keepthe procedures for preparing proposals simple,the RuralInvest methodology requests an estimateof two numbers for projects without directmarkets for its products.
First, you should estimate the number of personsthat will benefit directly from the project. Thisincludes both employees (e.g. school teachers,nurses in clinics, park rangers, maintenancepersonnel, etc.), as well as clients and other directusers (patients, school children, vehicle drivers).
Determining this figure for an, as yet, unrealisedinvestment may be difficult. It is often necessary tolearn from the experience of others. For example,it may be that you have no idea of the number ofpatients that might be expected in a newcommunity clinic. However you can find out theprior experience of other clinics of similar size(speaking with staff of Health Ministries or NGOsthat deal with these types of activities).
Secondly, you should estimate the number ofpersons indirectly affected by the investment. Inits most simple form, this task consists ofcalculating the population within a determineddistance (e.g. 5 km.) from the site of the
investment. This method probably is the mostappropriate for clinics, roads, electrification, etc.But remember, there is no logic in saying that theentire population of a Province or Department isan indirect beneficiary of a small healthcarecentre in the care of a single nurse. In the case ofworks such as the protection of a river basin ormountainside, you should attempt to estimatethe number of inhabitants that may be affectedby the investment, either down river or within thevalley, etc.
2. Estimating the Value of the Benefits
Once the population of indirect and directbeneficiaries has been established, the nextchallenge is to quantify the impact; that is,determine the value of the benefits that will result.It is important to understand that the type anddegree of benefit will never be the same for allusers. People living near the project site mayreceive greater benefit than others. By the sametoken, the example of mangrove swampprotection shows us clearly, that the benefitsenjoyed by different types of users - shrimpfishermen, the tourist sector and farmers - can alsobe very different.
Although there are exceptions, the problemsinvolved in quantifying benefits (e.g. the value ofeducation, or medical treatment that saves the lifeof a person) are generally far too complex to beattempted in the evaluation of a small project.However, there are cases where it is possible tooffer an approximation (see the example in thebox presented at the end of this section),especially if there are comparative data from otherinvestments, or some group or agency that hasconducted a recent study on the subject.
The difficulties in calculating a precise value forthe benefits do not justify forgetting about them.It is very important to provide the financingagency with some description of the nature andmagnitude of the expected benefits. In theabsence of this analysis, it is highly possible thatthe agency will choose to finance an alternativeproposal in which the applicants give a betterexplanation of the expected benefits.
3. Other Considerations
Any calculation of benefits assumes that theinvestment continue to function long enough togenerate these benefits. This is where theimportance of considering maintenance needsand costs comes in. This subject is discussed ingreater detail in Chapters 5.H and 6.A.
It is also important to remember that there maybe benefits, simply from the fact that theinvestment was made, in terms of jobs created in
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its construction or preparation. If the investmentgenerated a number of jobs during this period, itis important to indicate this benefit clearly in theproposal document.
The north of Ghana, in West Africa, is almostcompletely separated from the south of thecountry by the largest artificial lake in theworld. Some years ago, the only available routeto the South was a single bridge. A ferry servicehad previously operated, but silting had left thedocks far from the water and, in any case, itcould carry few vehicles. The approach rampsto the bridge were deteriorating rapidly, andthe highway engineer from the zone predictedthat unless there was investment in theirreconstruction, the bridge would becomeimpassable by the end of the next rainy season.
The cost of the investment to rebuild the bridgeapproaches was quite small, but how tomeasure the benefits? By counting trafficvolumes, and talking with drivers to determineseasonal variation in traffic flows, an estimatecould be made of the number of direct users.Given the lack of alternate routes, the numberof indirect beneficiaries could be estimated as amajor portion of the population of the northernpart of the country. But what would be thevalue of the benefit that they would receive?
If the bridge became unusable, most buses andtrucks would have no alternative but to travelup through one of the neighbouring countriesand then cross back into Ghana in the extremenorth of the country (there was no passableborder crossing for much of the northern half ofthe country). This route would add severalhundred kilometres to the distance travelled pervehicle. Without even considering the cost ofpassing through two sets of customs (onleaving the country and re-entering), and onlytaking the per kilometre operating cost ofvehicles, the total additional transport costwithout the bridge, and therefore the value ofthe benefits, could be calculated. Even if it wasassumed that some vehicles could use theferries, the benefits would only decreasemarginally.
Of course a calculation of this type is vulnerableto many errors. It is no more than anapproximation. No account has been taken ofother losses, such as reduced sales ofagricultural products, or increased travel timesfor passengers. And the reality is that suppliesfrom the South might well be partly substitutedby products brought in from neighbouringcountries. The key principal, however, is todemonstrate that the benefits, although lackingprecision, would without doubt far outweighthe cost of the investment.
SMALL INVESTMENT,LARGE BENEFIT
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Chapter IV
EVALUATION AND SELECTION OFTECHNOLOGY
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IV EVALUATION ANDSELECTION OFTECHNOLOGY
The idea for an investment project rarely startswith the technology to be applied. Instead the
investor normally takes as a starting point theavailability of some resource or the identificationof a good market opportunity. In the case of non-profit generating investments, the justification ofthe project almost always lies in the response to asocial or community need.
However, once the market evaluation (or theutility of the benefits in the case of social orproduction support projects) has been adequatelycompleted, it is necessary to consider thetechnology to be used.
The use of the word "technology" does notnormally imply investment in advanced and costlyequipment. To the contrary, most of theinvestments considered in this manual use onlysimple machinery. In fact, it is not uncommon inthe case of agricultural projects, for theinvestment to be inferior to the need for workingcapital.
A. Reconfirmation of theScale of the Project
In preparing the detailed project, the appliants,together with the local technician, must make aseries of assumptions about the scale of theinvestment. A first step, therefore, is to reconfirmand, if necessary, make adjustments in the scale ofproduction proposed in the initial profile. This inturn, normally requires the results of the demandanalysis discussed in Chapter 3. The analysis of themarket (or the demand for projects withoutmarket for their products) should indicate whetherthe scale originally proposed is realistic, in terms ofthe demand and the prices.
The amount of resources that are available alsomay be relevant in establishing the scale ofproduction. Although the applicants are usuallyconscious of the limits set by the availability ofland, they frequently forget to take intoconsideration the equally important need forwater - for example, in irrigation projects.
Another basic resource that is often taken forgranted is the availability of labour. Although aproject may be intended to benefit the entirecommunity, it is often difficult to find thenecessary manpower, especially if the need occursprecisely during harvest time. The migration ofmen to work in other zones of the country during
part of the year may also significantly reduce theavailability of manpower in certain months.
What other factors may determine the appropriatescale for the productive activity? The following areworth noting:
c Knowledge of, and experience in themarket. The existence of a well establishedmarket for the product(s), the variability ofprices from one month to the next, and therisks of losses (especially for perishableproducts) are all factors that should betaken into careful consideration whendetermining the scale of production.
c Prior knowledge of the technology. If thetechnology proposed is well known, theparticipants are experienced in its use, andrepair and maintenance services are readilyavailable, a larger scale of production maybe justified. On the other hand, if there isconsiderable uncertainty regarding theproduction process, or if the supply of rawmaterials is problematic, a smaller scale ofproduction may be wiser, as long as it isconsistent with the objectives of the project.
c The number of persons or families in thegroup of applicants. Obviously, it makes littlesense to propose a project that will generate$1,000 per year, if the project is expected tomake a significant contribution to theincomes of 100 families.
c Managerial capacity. Generally speaking, thelarger the investment and the more peopleinvolved, the more complex the job ofdirecting the work will be. If the applicant(s)have no prior experience in managinginvestments, it would be unwise to startwith a major investment. The lack ofmanagement capacity is probably the primecause of failure in small companies.
When determining the appropriate scale ofinvestment, always bear in mind the possibility ofcarrying out the investment in phases; that is,starting small, with the intention of expanding inthe future if all goes well. However, phasing ofproduction is possible only if the required financialresources are available over a long period of time.If the applicants have only a single opportunity toaccess financing, then using a phased investmentapproach will not work.
B. Choosing the Production Technology
Although the scale of the investment is, without adoubt, a primordial consideration in the selectionof the technology, other elements must also beconsidered, even in the simplest of projects.
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Among these are:
c What are the market requirements? If themarket demands grain with no more than12% humidity and the project is located inan area of heavy rainfall, it would beimprudent not to consider buying a drier, ifthe project involves grain production. Ifthere is demand for shirts of a certain rangeof colours, it might be useful to include adying plant as part of the investmentnecessary for a clothing factory. If themarket pays a premium for out-of-seasonfruits and vegetables, it may be worthwhileto consider irrigation technology orgreenhouses for a horticultural project.
c What are the legal requisites regarding theenvironment or sanitation? The law mightdemand treatment of effluent from theproduction process (Chapter 5) and manycountries require specific measures (e.g.tiling, drainage, stainless steel counters, andinsect exclusion) in facilities used forprocessing foodstuffs.
c Will it be necessary to warehouse rawmaterials or finished goods? When rawmaterials are available for only a few monthsout of the year, it may be profitable toinvest in equipment (e.g. freezers) for theconservation of raw material and therebyextend the period of operations. If theprices of a finished good are highly variable,it might prove profitable to store theproduct (if it can be done) to sell in times ofhigh prices.
c How flexible should the production processbe? Up to a point, capital investment(machinery and equipment) can be replacedby hand labour and vice versa (see thefollowing illustration). It is, therefore,important to identify, at the outset, therelationship of the tasks that will be done byhand with the available manpower.Furthermore, due to their investment cost,or operating capacity, some technologiesare simply uneconomical below a minimumproduction level. If there is doubt as towhether that level is achievable, in light ofthe scale of production desired (see above)it may be necessary to consider otheralternatives
All of these factors should be considered as partof the technological evaluation. Frequently,neither the applicants nor those that help themwill have the technological capacity to answer allof the questions that arise. At minimum, it isimportant to speak with several sales people tofind out what technologies are available whichmight be appropriate for the needs of the project.
Better yet, if the financial agency has access tonon-reimbursable funds for technical assistance,would be to contract an independent specialiston the subject and work with that person. In thisway you will be able to adequately consider therelationship between the market, the availableresources and the production method.
C. Experience and Capacity of theApplicants
A frequently forgotten factor in the technologicalcalculation is the relationship between thetechnology chosen and the experience andcapability of the investors. If the technologydemands a management level beyond theabilities of the group, it could cause graveproblems in the quality of the product, or simplyresult in the failure of the entire process.
For example, if a group without prior experiencein aquaculture plans to develop three hectares of
When speaking of the selection of technology,we are generally thinking of the technologythat will be used in the operation of theinvestment (machinery, irrigation, etc.). Butthe investment process itself is also influencedby the technology selected, above all in thecase of non-income generating investments,such as buildings, roads and watershedprotection.
In such cases it is important to balance theneeds and requirements of the differentparticipants. From the point of view ofefficiency, for example, it might be better tocontract a specialized company with the latestmachinery to build the bridge within a fewdays. However, to ensure adequate localcontribution and ownership, it will often bebetter to use simpler technology, whichalthough slower, will allow the local inhabitantsto contribute their manual labour and developa pride of ownership in the structure.
The technology may also influencemaintenance needs. On the one hand,structures built with high technology mightrequire less maintenance (such as an asphaltroad) or work more efficiently (wells withelectric or gasoline pumps instead of handpumps). However, maintenance and repairmight be beyond the capabilities of thecommunity, and the sustainability of the projectwould suffer.
THE CHOICE OF TECHNOLOGYAND THE INVESTMENT PROCESS
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ponds for the intensive production of tilapia, theproposal should be treated with extreme caution.Any form of aquaculture is subject to high risksfrom diseases and predators that can eliminate anentire population from one day to the next.When dealing with an intensive system, wherethe concentration may be up to ten times thenormal population, the possibility of disaster isvery high. In this case there are two broadalternatives:
a) Convince the investors to use a lessdemanding technology
b) Contract the services of a professionaloperations manager, with ample experiencein intensive production
Even in the case of a simpler technology (forexample semi-intensive production), if theparticipants have no prior experience, access totechnical support should be included as part ofthe investment cost.
In general, it is unacceptable for the project tolearn on a trial and error basis during the initialstages of implementation; buyers who receive aproduct of poor quality, or which does not complywith the demands of the market, simply will notcome back again. Technical support can come inthe form of training of project staff before start-up,and having technical experts on call to deal withproblems that may arise.
No amount or type of training can prepare aperson for all of the possible events of real life. If agroup of milk producers wants to open its ownprocessing plant, it should not expect that amonth long training course can prepare themadequately for the operation. As a minimum theywill need frequent visits from an advisor, andwould do much better to contract a specialist inmilk production, to guide them through the firstfour or six months of the project.
The following points should be seriouslyconsidered when choosing a technology
c Does the proposal call for very advanced,complicated or demanding technology?Unless the persons involved have ampleprior experience with such technology, it isrecommended that they contract an outsidetechnical manager or select a simpleralternative.
c In which of the operations will therebe a need for training (or at least, astrengthening of existing capabilities) forthe project’s personnel?
c Will it be possible for the project staff todraw on outside technical support duringthe first months (or years) of the project’sactivities? Would periodic visits be sufficient,or would the full time presence of an adviserbe required for the initial months?
c Will there be a need for quality controlequipment? (testing laboratory, humidity orcolour analysers, etc.) Who will operate thisequipment? Must they be certified orotherwise qualified?
D. Maintenance and Repair
The need to consider the costs of repair andmaintenance for the chosen technology isdiscussed in Chapter 6. Here we will consider thelogistical side of the process. That is, when youselect a technology you have to make sure thatthere exists a capacity to repair and maintain thatequipment. This consideration applies not only toprocessing and manufacturing machinery, butalso to vehicles and office equipment, especially"delicate" machinery such as copiers.
Among other factors for consideration are:
c Does the equipment come with a guaranteeor service contract, under which themanufacturer guarantees to keep it in goodcondition. If so, for how long does theguarantee or agreement last? Who does the manufacturer use for this work, and how far away are they based?
c Are there other users of the sametechnology in the project’s operating area?Who are they? Are they satisfied with theattention they receive regarding parts andservice?
c What are the sources of parts for themachinery? Do these sources carry a broadenough inventory of parts? Or do theyhave to order them from the USA or fromEurope? There is nothing worse thandiscovering, when a machine breaks downin the middle of the high season, that thevital part will take two weeks to arrive fromthe country of origin.
c Does the machine need service by anexpert, trained in the factory? Can anycompetent mechanic maintain theequipment? If a formally trained expert isneeded, where is the nearest person? Howmuch does he charge per visit?
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Chapter V
SUSTAINABILITY AND ENVIRONMENTAL IMPACT
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V A. Why Consider EnvironmentalImpact?
For many communities and groups seekinginvestment funding, conducting an environmentalimpact evaluation may seem merely to increase thework required, while providing very little benefit.All too often, an environmental study is seen asbeing required for the sole purpose of satisfyingthe demands of the city slickers or foreigners whobarely know anything about the problems thatexist in the project area.
However the reality of the matter is very different.Environmental evaluation is not just an obstaclethat the applicants must surpass before fundingcan be approved; rather, it is a tool that will insurethat the resources invested will provide the projectwith the long term sustainability that is essential.At it is important to remember that not allinvestments require detailed environmentalevaluation. Many social projects, involvingeducation, health care, road repair or theprovision of other simple infrastructure will havelittle if any environmental impact and thus requirelittle time to be spent on evaluation.
What is the relationship between environmentalevaluation and the sustainability of the project?Although many factors may influencesustainability, in the rural environment the use ofnatural resources, such as water, soils andvegetation (e.g. trees) is often at the heart of theinvestment project.
If, in the life of the investment, natural resourcesare used in such as way as to result in theirdamage or destruction, it is clear that within avery few years there will be nothing left to exploit.One very common example is the conversion ofslopes or tree-clad hillsides into cornfields or otherannual crops. Within a very short time, all of thesoil on the slope has slid to the bottom of thevalley, and been carried away by streams andrivers, leaving behind barren slopes which yield solittle there is no point in continuing to farm them.And such bare slopes threaten not only theincomes, but also the very lives, of those living inthe valley below. Without the protection providedby the vegetation that once covered the slopes,hurricanes, monsoons and heavy rain can causegiant mudslides, engulfing whole communities.
Poor environmental practices can cause damagenot only to those responsible. If a processing plant(e.g. a slaughterhouse) discharges waste materialsinto a river, it can cause disease, loss of fish, and areduced quality of life for the entire populationdownstream.
Sometimes the damages caused by an investmenttake time to become apparent. For example, theover-utilization of underground water resources
SUSTAINABILITYAND ENVIRONMENTALIMPACT
The sustainability of an investment refers to itsability to continue generating benefits into
the future. This, in turn depends upon a numberof factors including the continued availability ofresources used in the project, the management,and the long-term relationship of benefits tocosts. Sustainability is probably the mostimportant aspect in project design andevaluation, but is also the factor that typicallyreceives the least attention – in part because it ishard to look into the future and predict whetheran investment will be sustainable in the long run.Many are not, and most people have seen theabandoned factories, empty schools and broken-down tractors that all represent unsustainableinvestments.
People often think that sustainability is the sameas profitability, and it is certainly true that aproject conceived to generate income can notbe sustainable if that income does not exceedthe costs of operating the project. Butprofitability alone in no way guaranteessustainability. A poorly managed project will failregardless of the underlying profitability of theinvestment, and this aspect of projects isconsidered in its own right in Chapter 8. Aprofitable investment will also fail if it depletes ordamages the natural resources it depends upon,whether they be trees, water or the organic matterin soils, and a considerable part of this chapter willexamine the factors affecting the environmentalsustainability of rural investments.
As mentioned earlier, there are in addition manytypes of investment whose principal purpose isnot the generation of income, for example a localschool. While the sustainability of projects of thistype does not depend on their profitability, otherfactors may be of importance, includingenvironmental sustainability (particularly aconcern for access roads, for example) andoperational and maintenance costs. If a projectgenerates little or no income, where is the moneyto be found to maintain and repair it year afteryear?
The financial sustainability of income-generatingprojects is dealt with in much greater detail in thenext chapter. In this section we analyse theimportance and impact of other factorsinfluencing the sustainability of rural projects, andin particular environmental impact and financingof non-income generating projects.
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can result in effects that become apparent onlyduring the lifetime of our children. Neverthelessthey are important impacts and eventually ourdescendents will accuse us of ruining their lives inthe name of a short-lived benefit.
The inhabitants of rural areas are more aware thancity dwellers of the relationship between peopleand the natural world we live in. Of course,everyone wants to have sufficient resources tofeed his or her family and to satisfy their needs foreducation and medical treatment. But a poorlydesigned project can result in a loss of income andreduced production in the future, which will leavethe family in worse conditions than it faces today.The future should not be sold out so cheaply!
B. What is Environmental Evaluation?
Traditionally, environmental evaluation consists ofa technical analysis of an activity or proposedproject. It is generally undertaken to identify andassess possible negative environmental impactsthat may result from the project, and to proposeappropriate mitigation and monitoring measures.
It is important that the environmental assessmentprocess is initiated early in project preparation sothat these measures can be incorporated intoproject design. It is also increasingly recognizedthat the assessment cannot be a purely technicalexercise, carried out by external specialists.Instead, it must involve project beneficiaries andother affected populations. Finally, recentenvironmental assessments are often not limitedto the biophysical environment, but also covereconomic, social and cultural aspects.
Environmental assessment (EA)
The general process of assessing environmentalimpacts associated with human developmentactivities which may include studies rangingfrom comprehensive (EIA) to more limitedreviews. It normally includes assessing potentialnegative impacts and elaborating measures tomitigate and monitor them.
Environmental Impact Assessment (EIA)
A tool used to identify and assess the potentialimpacts of a proposed project or activity,evaluate alternatives, and formulateappropriate mitigation, management andmonitoring measures (generally in the form ofan environmental management plan).
Environmental monitoring
Activities to measure and evaluate (i)environmental changes caused by a project and(ii) implementation of measures taken to
prevent or mitigate these changes.Environmental monitoring is based oncollection of data before, during and after theproject. It often uses indicators, i.e. quantitativeand qualitative variables which can bemeasured and which, if regularly observed,show changes in the project environment.
Environmental mitigation measureAn activity aimed at avoiding, minimizing,reducing the severity of, or controlling, adverseenvironmental or social impacts of a proposalthrough designing alternatives, scheduling,adding protective measures, and other actions.
Environmental screeningThe first phase of the assessment process, inwhich an initial ranking is assigned to a projectindicating the anticipated level of impact andthe corresponding required EA "treatment".
The types of rural investment projects consideredin this manual are of micro, small or mediumscale. Many of these projects have little or noimpact on the environment; their effect may evenbe positive (e.g. a decrease in erosion resultingfrom introduction of agroforestry). They generallydo not require a full Environmental ImpactAssessment (EIA), which are typically defined bynational environmental laws. However, asexplained in section A, even small ruralinvestment projects may have environmental riskswhich need to be assessed and, if necessary,mitigated.
As a result, this manual provides simpleprocedures for environmental assessment whichproposed in this manual provide a readily usabletool for environmental assessment of suchprojects. They are meant to be applied by localtechnicians, or other persons responsible forassisting the applicants in the preparation of theirinvestment proposals. The procedures alsoindicate when the potential impacts of a projectare so important that a specialized environmentalexpert is needed.
Some projects included in this manual - such asthose involving infrastructure construction, forestexploitation and agroindustry, as well as thosethat promote agricultural expansion, even on asmall scale - involve potentially significantenvironmental risks. These project types are, inmany countries, covered by the nationallegislation on EIA. In these cases, the responsibleparties should follow not only therecommendations proposed in this document,but also the relevant requirements established inthe legislation.
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C. Procedures and Stages ofEnvironmental Evaluation
Pre-selection of Project Proposals (screening)
Before entering into details in the identification ofpotential environmental impacts of the proposedactions, the project should be classified into one ofthe environmental categories described below.
An initial classification should be done by the localtechnician, preferably during the preparation ofthe project profile (RuralInvest Module 2) so thatthe environmental assessment process can belaunched at an early stage of project preparation.The classification should then be double-checkedduring detailed project formulation andevaluation (Module 3). When in doubt about theright category, the local technician should consultenvironmentally qualified regional/supporttechnicians.
Category A
Projects in which no or negligible adverse impactson the environment are foreseen and hence nomitigation measures are necessary.
Category B
Projects in which only low environmental impactsare anticipated. In these cases, possible impactshave to be identified as part of the projectformulation process, and a series of mitigationmeasures has to be elaborated and incorporatedinto project design before the project is submittedfor approval.
Category C
Projects whose environmental impacts may bemoderate or significant but which are stillmitigable. Category C projects normally requirean environmental assessment, undertaken by anenvironmental specialist, and detailed mitigationmeasure proposals before submission forapproval. The technician and theperson/committee responsible for projectapproval should also check whether a fullEnvironmental Impact Assessment (EIA) is requiredby the national legislation and consider whetherspecific environmental studies on critical aspectsshould be carried out.
Category D
Projects in which significant adverse effects areforeseen, for which there are no effective mitigationmeasures, or projects which are incompatible withthe sustainable development policies of theconcerned country or of international development
agencies. This category also covers activities whichare planned to be located within strict naturereserves or national parks3. In these cases, the project should either be completelyreformulated/relocated or rejected for funding.
Annex 1a contains an illustrative list of investmentprojects that can be included in the categoriesdescribed above. However, this list is onlyindicative, and the categorization of any individualproject should reflect the specific characteristics ofthe project site. It is thus recommended that,before starting RuralInvest use, environmentalexpert advice is sought on how to apply thesecategories in the project area.
When a project involves activities in more thanone category, the technician should classify it inthe category that refers to the activities with mostenvironmental impact. In other words, if aproposal includes activities listed in categories Aand B, it should be classified as category B. It isalso possible that, during the environmentalassessment, the technician is convinced that theproject should be classified in another categorythan the one originally selected. In that case, theproject should be reclassified accordingly, and anynew requirements followed.
According to this methodology, projects classifiedin Category A require no environmental mitigation,projects in category D would be excluded fromfinancing, and categories B or C would require anenvironmental assessment to identify theirenvironmental impacts and respective mitigationmeasures, which must be incorporated into projectdesign. For these two categories, we recommendthe following procedures.
D. Assessment Stages for Category Band C Projects
The procedures presented in this section areproposed for carrying out an environmentalassessment in four stages. These procedures aremeant to be applied by the local technician (orother person responsible for the environmentalassessment) but s/he should closely involveproject beneficiaries at all stages. Theenvironmental assessment process should also belaunched early enough (during phase 2, seeChapter 1) for the results to be incorporated in theproject proposal.
Stage One: Detailed definition of theproposed activities
To carry out an environmental assessment, it isnecessary to clearly define the project’s proposedactivities. In other words, the following questions
3 See section E.
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4 For example in road construction, cutting of trees along the road bed generates direct impacts (e.g. erosion andsedimentation in a nearby river) whereas indirect impacts may result from access to previously isolated areas, leadingto the conversion of forest into farmland.
should be answered: What does the project wantto accomplish? Where? What kind of materials,tasks and resources will be involved? How manydifferent ways are there to carry out theseactivities?
Stage Two: Definition of the environmentalcharacteristics of the proposed project siteand its immediate surroundings
At this stage, the environmental characteristics ofthe project area should be defined: type andquality of its water bodies (surface andgroundwater); types of soil and vegetation(rangeland, bush, forest, etc.); existing orproposed protected areas; distance fromecological, historical, archeological or uniquephysiological sites; special constraints (slopes,aridity, etc).
In many cases, this information can be found inthe local development plan or other similardocument.
Stage Three: Identification and evaluation ofpossible environmental impacts
At this stage, it is necessary to identify andevaluate the environmental impacts that may begenerated by the proposed activities in everyphase of the project; whether they are probable orunlikely, positive or negative, direct or indirect 4 ,reversible or irreversible, local or regional,temporary, permanent or periodic. Depending onthe nature and characteristics of each particularcase, the magnitude of the impacts should beestimated (e.g. insignificant, low, moderate orsignificant). In category C projects, wheneverpossible, the impacts should be quantified; forexample, the amount of soil that may be lost, thedegree of erosion that may occur, or the numberof endangered forest species that may disappearfrom the project area.
To provide guidance for the technician or theperson responsible for environmental evaluation,this manual includes a series of specificenvironmental checklists, applicable to differentactivities and investments in rural areas (seeAppendix 1b). The technician should make surethat the factors presented on the checklists areconsidered when environmental impacts areanalyzed.
Stage Four: Definition of mitigation measuresand their incorporation in the project design
Once possible environmental impacts have beenidentified, the technician should define themeasures that can be taken to prevent, minimize,
mitigate or compensate them. S/he should alsoindicate the costs of these measures and definewho should take responsibility on theirimplementation. The environmental checklistspresented in Appendix 1b include examples ofmitigation measures for impacts associated with avariety of rural activities and investments.
Finally, the analyst should present the results ofthe evaluation in such a way that the informationon potential environmental consequences andpossible mitigation measures can be used in thedecision-making process. This should lead into theincorporation of the suggested measures intoproject design.
E. Special Cases
Protected Areas
The procedures described in section D areapplicable to all rural investment projects,independent of where they will be implemented.In some cases, additional restrictions apply to theproject due to its location. This is the case ofprotected areas, established by the nationalgovernment or regional/local authorities toprotect and maintain biological diversity, andnatural and cultural resources. Protected areasoften consist of a core zone, with stricterprotection, and surrounding buffer zones or socalled multiple usage zones, in which morehuman activities are allowed. In addition, mostcountries have established, through legislation, asystem of protected areas, which often involvesseveral categories with different use andmanagement rules 5.
When a project is located within a protected area(or an area proposed for this classification), allinvestments and activities - agricultural, forestry,commercial, industrial or tourism - should beadapted to the following conditions:
c The activities should be located outsidestrict nature reserves, national parks, andcore zones, or zones established torehabilitate protected areas 6;
c Activities proposed for other types ofprotected areas, their buffer zones, ormultiple usage zones, should be compatiblewith the Management Plan of the PA. To ensure this, the applicant needs toestablish contacts with the competentenvironmental agency responsible fordefining the conditions and standards foractivities within the PA;
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c The following is an illustrative list ofactivities which may be allowed/compatiblewith the Management Plan. However, eventhese need to be environmentally reviewed,and approved by the competentenvironmental agency.
a) Sustainable extraction of non-woodforest products, that is, natural productsother than wood that can be obtainedfrom forests and wooded lands 7.However, these activities should notinvolve pesticide use or the extractionof lumber;
b) Sustainable agro-forestry activities;
c) Rehabilitation planting with nativespecies in deforested areas;
d) Community forestry;
e) Pasture management on naturalpastures;
f) Ecotourism.
Pest management
Pest management is a sensitive issue thatrequires special attention in rural investmentprojects in order to avoid potentially severeadverse health and environmental impacts.When preparing rural investment projectsinvolving crop cultivation, livestock raising orforestry, the technician should ensure that theproject adopts an "integrated pest management"approach (see below) and that the followingthree rules are respected:
First, purchase and use of pesticides classified bythe World Health Organization as ExtremelyDangerous (Class Ia) or highly dangerous (Class1b) should be excluded from financing. These
substances and examples of pesticide productsare listed in Appendix 1a, Table 1.
Second, purchase and use of pesticides over largeareas should be excluded from financing due tothe significant risk of health and environmentalhazards and difficulty of establishing an effectivecontrol system.
Third, purchase and use of pesticides classified bythe World Health Organization as ModeratelyDangerous (Class II) should be excluded fromfinancing if the following preconditions are notmet:
i) The country implements adequate legalrestrictions on the distribution and use ofthese pesticides;
ii) safeguards are in place to prevent the use of,and access to, these pesticides by laypersonnel, farmers, or others withoutappropriate training, equipment and facilitiesto store and apply them properly;
iii) Users adhere to precautionary methodsproven to be effective under field conditionsin developing countries.
All projects involving crop cultivation, livestockraising or forestry should adopt an integrated pestmanagement (IPM) approach to reduce relianceon synthetic chemical pesticides and to promotethe use of biological and environmental pestcontrol methods. Pesticides should be used on anas-needed basis only, as a last resort component ofan IPM strategy. In these cases, it should be ensuredthat (i) the selection of products minimizes healthand environmental hazards, and (ii) these pesticidesare correctly handled (including mixing andstorage) and applied (including use ofrecommended protective gear and appropriateapplication equipment and techniques).
5 The categories used by the World Conservation Union (IUCN) are presented below to give an example of possiblecategorisation. However, the number and names of PA categories, and related use and management rules, vary fromcountry to country. The local technician should become familiar with the PA system in use in his/her country.
IUCN categories: I. Strict Nature Reserve/Wilderness Area: protected area managed mainly for science of wilderness protection; II. National Park: protected area managed mainly for ecosystem protection and recreation; III. Natural Monument: protected area managed mainly for conservation of specific natural features; IV. Habitat/Species Management Area: protected area managed mainly for conservation through managementintervention; V. Protected Landscape/Seascape: protected area managed mainly for landscape/seascape protection and recreation; VI. Managed Resource Protected Area: protected area managed mainly for the sustainable use of natural ecosystems.
6 Since each country uses different names for the various types/categories of protected areas; the technician responsiblefor the environmental evaluation should adjust the names referred to above to those used in his country.
7 Non-wood forest products (NWFP) include products used as or with food (e.g. fruits, mushrooms, nuts, herbs, spices,cacao, honey, and animals hunted for meat), fibres (such as rattans), rubber, resins, gums, and plant or animal productsused for medicinal, cosmetic or cultural purposes. They can be gathered from the wild, or produced in forest plantations,agroforestry schemes and trees outside forests. NWFP are vital to the daily subsistence of forest-dependent communities,and contribute to the subsistence and local commercial economy in other rural communities. Some NWFP are alsocommercialised in a larger scale (e.g. cork).
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It is recommended that all projects involvingpurchase and use of pesticides, or that are likely toincrease pesticide use, are classified inenvironmental category C (see section C). Theywould thus require, as a minimum, anenvironmental assessment, undertaken by aspecialist, and detailed mitigation measureproposals before submission for approval.
F Monitoring Environmental Impacts
When carrying out the environmental assessment,the technician, together with future projectpersonnel, should also identify indicators formonitoring the environmental impacts of theproject and the implementation of theenvironmental mitigation measures. Environmentalmonitoring should be initiated at the start of projectactivities and continued throughout the project.
Through monitoring indicators, the projectpersonnel can:
a) Verify that the environmental mitigationmeasures are implemented and are achievingthe desired effect;
b) Detect possible unforeseen environmentalproblems in time to make the necessaryadjustments in the operation of the project;
c) Provide information and inputs for theevaluation of the project.
In Appendix 1b, a tentative list of monitoringindicators is presented for different rural activitiesand investments, according to project type(agriculture, forestry, aquaculture, ruralinfrastructure, eco-tourism etc.). However, theirapplicability to micro and small-scale projectsshould be checked during project formulation.The indicators should be cost-effective, andadapted to the available skills and equipment.
In addition to monitoring the impacts of eachinvestment/activity, it is often necessary tosimultaneously evaluate the overall impacts ofseveral investment projects implemented in thesame area. For this purpose, a survey instrument isproposed. An environmental survey on eachinvestment should be conducted at the end of thefirst year or, in the case of medium or long-termprojects, every two years. These surveys could becontracted to a consultant firm specialized in thearea or field concerned.
For these surveys, three environmental indicatorsare recommended:
a) Number of projects that have incorporatedenvironmental mitigation measures;
b) Number of person-months contracted toprovide technical assistance on environmentalaspects;
c) Number of environmental checklists/testcharts developed with technical assistance.
G. Specialized Support andEnvironmental Studies
1. TRAINING
For environmental impact mitigation measures tobe effective, project personnel must receivetraining in environmental matters. This trainingshould be provided to field technicians withtechnical responsibility on project execution,and/or to support/regional technician.
Training, which should be organized during thefirst two years of the project, could include, forexample, a one-week course on environmentalimpact assessment methods.
2. TECHNICAL ASSISTANCE
It is also recommended that the project personnelseek support from technical assistance programson environmental assessments. These programscould be tapped, for example, to contract – forshort periods – an environmental expert duringthe first year of the project. This consultant wouldbe responsible for providing information andassistance to project technicians on the evaluationof environmental impacts and their mitigation.S/he would also review the proposals presentedfor financing to identify possible environmentalimpacts and to determine if they were taken intoconsideration by the field technician working withthe applicant.
3. ENVIRONMENTAL STUDIES
As mentioned above, in the case of Category Cprojects, a specialized environmental expert orfirm may need to be contracted to study thecritical aspects of the project or to undertake a fullEnvironmental Impact Assessment (EIA). Specificstudies may also be necessary, for example, in thecase of agro-industrial projects, to evaluate the useof clean technologies or the design of wastetreatment facilities.
H. Social Impacts of Rural InvestmentProjects and Sustainability
The small-scale rural investment projectsconsidered in this manual aim at improving the
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livelihoods of rural populations and, in manycases, also address social issues, such as health andeducation. It might thus appear improbable thatthey would result in major negative social impacts.
Nevertheless a number of potential investments inrural communities could result in profoundchanges in social relations within a community;changes that might ultimately threaten thesustainability of the investment itself. In one casein West Africa, for example, strong resistancedeveloped among many local farmers to theoperation of a recently established local school, asit was believed to have contributed to a steepincrease in the migration of young people tourban centres and hence a reduction in labouravailability within the community. The school wasfinally closed. Thus, all projects, even small-scalerural investments, should pay attention to possiblesocial impacts.
Key types of projects which may have a significantsocial impact include:
c Those affecting human health. Poorlydesigned irrigation systems, for example,may lead to growth in water-relateddiseases because insects proliferate in watercanals;
c Those related to changes in access to landand other resources. Development ofagriculture in a traditional pastoral area, forexample, may result in competition overwater points. This illustrates the wider issueof benefit-sharing: if all the benefits of aninvestment go to a small group of people, itmight lead to internal conflicts within thecommunity;
c Those increasing the economic power ofwomen or other disadvantaged groups. Theprovision of day care, access to markets(through new roads), or wage labour inlocal processing plants may all contribute tosignificant shifts in social relations within thecommunity.
c Finally, a project may also have unforeseennegative impacts on vulnerable groups, suchas indigenous people (if, for example,forestry activities are intensified in theirliving area) or women (if, for example, newagricultural machinery is introduced, andonly men are trained in its use). Specificmeasures may be needed to ensure thatthese groups fully benefit from theinvestment.
The environmental checklists presented inAppendix 1b include some social impacts andpossible mitigation measures, which should beconsidered in the environmental assessment.
I. The Sustainability of Non-IncomeGenerating Investments
In addition to considering their relationship withnatural resources, investments focused onproduction support, social benefits and evenenvironmental improvement – in other words,investments whose principal purpose is not togenerate income – face the challenge ofremaining sustainable once external fundingdisappears. In contrast to those projectsestablished to make a profit, projects of this typehave no guaranteed income flow to finance theirongoing operating costs.
The sustainability of these projects is thusdependent on the necessary resources beingavailable to continue operation, once the initialinvestment has been made. A school without ateacher, a clinic without a nurse or access tomedicines, or a road that has been washed out byspring floods, are all examples of unsuccessfulinvestments. In each case, there was a failure tomaintain the availability of the necessary resources(personnel, materials or maintenance) needed toinsure the long term functionality of theinvestment.
The process of formulation for non-profit projectsrequires that the source of these future resourcesbe precisely identified, and that the nature of theguarantees made as to their availability bedetailed. After all, an assurance of future resourcesis only as good as the guarantee that backs it up!Among the possible sources of resources for futuremaintenance and operating expenses, are thefollowing:
c Contributions in cash or in kind from thecommunity itself, through an association ofusers (drinking water, latrines, access roads,etc.);
c Charging the beneficiaries (healthcarecentres, schools, etc.) at least some portionof the service cost;
c Contributions from the local or municipalgovernment, including personnel, materialsor cash;
c Contributions from an NGO;
c Contributions from national ministries(health, education, public works andtransportation, etc.);
In fact a combination of several sources isgenerally necessary. Charging the beneficiaries is afrequent tactic, but rarely covers the entire cost ofoperations and upkeep.
Whatever the source(s) are, it is important toobtain and attach a letter of commitment to the
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proposal, specifying the amount and the length ofthe guarantee. If the source is official (localgovernment or a ministry), you should try and
ensure that the organization’s future annualbudgets include this commitment.
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Chapter VI
ESTIMATING COSTS AND INCOME
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VI ESTIMATING COSTSAND INCOME
Costs and income, combined with the plannedproduction schedule for the activity (the scale
of the operation), together determine theprofitability of income generating activities, aswell as the need for subsidies or user charges inthe case of non-profit projects.
Although the evaluations of market, technologyand sustainability should have provided many ofthese parameters (product prices, cost ofinvestment, etc.), at this point we are still far shortof having total knowledge of all of the elements.
An important beginning step is to verify and classifythe costs. Initial assumptions on the cost of differentcomponents of the investment should be checkedout, and the costs of the investment, operation andgeneral expenses each require a different treatment.
A. Verification and Classificationof Costs
The essence of the process of evaluating anincome generating investment lies in comparingthe benefits generated to the costs incurred. Bydefinition, only those projects in which thebenefits are greater than the costs deserve to beimplemented. Even in the case of non-profitinvestments, social, environmental or productionsupport projects – knowing the costs is aprerequisite for calculating the value of theinvestment under consideration and forcalculating the amount needed annually to coveroperating expenses.
For profit-oriented projects, it is necessary toestimate both the costs of the investment and allthose costs and incomes that stem from theoperation of the project.
It is easy for an applicant, enthusiastic about hisproposal, to underestimate the costs of a projector to assign them to the wrong category, whichcauses errors in the calculation of financingrequirements. The process of preparing a projectprofile in the field lays little emphasis on verifyingcosts – best estimates are acceptable at the profilelevel. Therefore, as a first task in the process offormulation and evaluation, the applicants andtheir advisor should review all of the costspreviously identified, in order to:
c Determine whether the initial costs areassigned to the correct categories (initialinvestment, replacement of investmentitems, annual operations, overheads);
c Break-down generalized costs into theirspecific components, e.g. breaking downthe estimated overall cost of a building intosuch components as: site clearing andaccess; the foundation; construction persquare meter; finishing (electrical andplumbing); furniture, etc;
c Identify costs not previously included, e.g.technical assistance, training, legal orhygiene requirements, mitigation ofenvironmental impact, improvement ofaccess roads, etc;
c Verify the validity of the costs to be usedthrough direct contact with salespersons,transporters, engineers and other specialistsknowledgeable of the area.
The contrasting costs of a project can be brokendown into three principle categories:
a) Investments and their periodic replacement;
b) Production costs (which generally vary withthe scale of manufacture);
c) General or overhead costs (which typically donot vary as a result of changes in the scale ofproduction).
The following is a brief description of eachcategory of costs.
1. Investment and Related Costs
The investment is the heart of any project. In facta project can be defined as an activity in whichan investment is made now in order to obtaina benefit in the future. An investment is a kind ofexpense, but it can be distinguished by theduration of its impact. If the impacts no more thana year, the cost cannot be considered as aninvestment and must instead be treated as anoperating expense.
a. Types of investments
Not all investments take the form of physical assets,although investments in works and machinery are,undoubtedly, the most common. However, onecan also invest in less tangible things: for exampleeducation, research and systems. When you buy astore or other business, you frequently will have topay for the "goodwill" of the previous owner; thatis, his network of commercial contacts. It isconsidered that the relationship, developed by theseller with his clients over the years, is an asset thatis worth money.
Establishing a permanent crop (including the costsof labour) is also an investment. If small areas of
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permanent crops are being replaced every year aspart of an established cycle (for example, 5% of thetrees every year), the cost is frequently included aspart of the operating expenses. While this does notmatter at this small scale, it is important toremember that the cost and availability of financingwill often differ according to its purpose. Ifsignificant areas are to be established in newplantings, or it is necessary to replace a highproportion of existing plantings (e.g. following thepurchase of a neglected farm), it rapidly becomesapparent that the high costs involved will causeproblems in the operating budget. However, if thenew plantings are treated instead as an investment(which they are), it will often be possible to obtainlonger term funds at lower rates, and there mayeven be a grace period on the payment of the loan.
When estimating the cost of a physical investment,the following factors must be considered:
c The initial price of the asset (machinery,equipment or materials) at their point ofsale;
c Any taxes levied on that price;
c Transportation of the asset to its finallocation, including insurance and, where theitem must cross borders, import duties;
c Installation and, if necessary, testing of theitem in its final location;
c Training of operators.
b. Economic Life
Some investments will last longer than the life ofthe project, especially in the case of physicalworks, construction and heavy machinery. Others,such as land, have no predetermined useful life,and it is generally assumed that their benefits willlast indefinitely.
However, many investments will have to bereplaced periodically, as they wear out (butremember: never less than a year, or it cannot beconsidered an investment). It is thereforenecessary to consider the economic or useful lifeof each investment; that is, the number of yearsthat it can be used until it is replaced.
Electronic equipment (computers, printers,telephones, etc.) are one of the categories withthe shortest economic life - perhaps no more thanfour years. In these cases, the economic life of theasset is primarily determined by the rate oftechnological change. A computer is normallyreplaced, not because it has ceased to function,but because it is no longer compatible with thelatest programs.
In the case of other investments, the economic lifeis strongly related to the use and maintenance of
the item, and the increasing cost of repair as itgets older. A car or truck, for example, can last aquarter of a century, but when a truck is used onrural roads in developing countries, the economiclife will not generally be more than 6 to 8 years.Remember, this doesn’t mean that the truck canno longer run after that time; rather that the costof keeping it on the road simply becomes too highto justify keeping it 8. Most businesses decidearound this time that it is cheaper to buy a newtruck and sell the old one.
The replacement cost should be recorded in theyear that replacement takes place. So, if you haveto change the old truck in the sixth year, youshould register the cost of the new truck (let’s say,US$35,000) in that same year.
c. Salvage value and residual value
Frequently, when an asset is replaced at the end ofits economic life, it still has value. Doubtless, thesix year-old truck still is worth a lot, maybe 20 or35% of its initial cost, depending on the taxstructure of the country. This value is called thesalvage value and it should be recorded as anincome in the year it takes place, in the same waythat the cost of the new truck is recorded as aninvestment cost. A few investments have almostno salvage value. These may include electronicequipment, fixed goods (such as wells, watercatchment tanks, etc.) or permanent crops at theend of their useful life span.
It is also necessary to take into account, especiallyin the case of investments having very longeconomic lives, that they may possess a significantresidual value at the end of the project life time.The residual value is what an investment is worthwhen the period analysed ends. For many assetsthis value is not enough to be worth recording,especially if it is in the distant future. However,when dealing with large assets such as buildingsand land, the residual value will often besignificant and can influence the profitability ofthe project.
To understand the importance of residual value, itis worth remembering that the project beganwithout any resources, but it used loans and othersources of financing to obtain the goods itneeded. During the period analysed, income fromthe project is applied to the payment of the loan.Before ending the analysed period, the cost ofthese goods has generally been completely paidfor. However, in the case of land, buildings, etc.,there still remains a great deal of value in theseassets and that value must be recognized whenthe project period expires.
Nevertheless, it is very important to distinguishcarefully between the annual cash flow and thefinancial rate of return (total profitability) - see
8 Also considering the cost to the project of having a truck out of service while it is awaiting spare parts.
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Chapter 9. The buildings and other goodsrepresent a value, but not an income. So youcannot claim residual values when dealing withcash flow, but you can include residual values inthe calculation of profitability.
d. Depreciation
The subject of depreciation is always raised bystudents studying the RuralInvest methodology.Inevitably someone always asks why the cost ofdepreciation is not included in the calculations.
The answer is simple: depreciation is purely a tax-related measure, defined by the ministry offinance, internal revenue service or the treasury ofthe country in question, specifically in order tooffer fiscal benefits to investors. The tax authoritiesdictate the manner in which a person or companymaking an investment can use the cost of thatinvestment to reduce their taxes each year. Thisamount is the depreciation, and often has littlerelation to the actual life of the asset. It alsochanges from one type of investment to another,normally to support government policies towardscertain sectors or activities. When a companycharges depreciation in its accounts, it does notactually set aside funds for replacement of theasset, it merely reduces its tax burden.
As a result, the concept of depreciation is ofrelevance in a financial analysis only where taxesare being taken into account. Under RuralInvesttaxes are given little importance, as the purpose ofthe analysis is to determine if the project iseffective and sustainable, not to maximise after-tax earnings.
Given that the calculation of taxes normally is nota high priority among those who analyse ruralinvestments of small or medium scale, you canleave the concept of depreciation aside until theproject generates enough profit and calls for amature consideration of tax matters.
2. Recurring Costs
Investments are not the only costs that a projectfaces. Once the project is under way, there arecosts that must be met annually (or morefrequently). Costs that are not investments aredescribed as recurring costs; that is, they occuryear after year. This concept deals with twodistinct categories: production costs and generalexpenses.
a. Production Costs
These are all costs directly attributable to theprocess of production. For example, in the case ofa small workshop producing clothing, the cost ofraw materials (cloth, buttons, etc.), packaging
materials, and the electricity used to operate thesewing machines and irons are production costs.
Labour is also considered a production cost if it isdirectly related to the output of the garmentworkshop. In fact, any cost that changes directlyin relation to the production volume is aproduction cost. The estimate of these costs isdealt with in greater detail below.
b. General Expenses
These include any cost that does not normallyvary according to the level of production. So,continuing with the example of the clothingworkshop, we can identify as general expenses thesalary of the workshop manager, the lighting ofthe building, and the salary of the truck driver,because these items do not change according tothe level of production. General expenses mayalso include property taxes, insurance policies,telephone bills and accounting services.
In reality, the separation between production costsand general expenses is not always clear. Any costwill change if the scale of production increasesenough. If it the business is very successful, forexample, the workshop might need a new, largerbuilding, or it might need to hire departmentmanagers. On the other hand, is the cost of labourreally tied to the scale of production? For example,can you send the workers home in the middle ofthe day, without pay, if the workshop has ordersonly for half of the normal number of shirts? Onlywhere workers are paid "piece-rate" – that is pershirt produced – can labour really be said to be aproduction cost.
Deciding whether an expenditure is a production(i.e. variable) or overhead (i.e. fixed) cost can behelped by the following "rule of thumb": Any coststhat increase when the level of output increases(or decreases) by 10% will be variable costs. Coststhat remain unchanged, however, will beoverhead or general expenses.
3. Training Costs and Technical Assistance
The assignation of costs for training, educationand technical assistance frequently causeconfusion; however, the same rules apply here asfor physical goods. Any expense for experts andtraining that only occurs once, or that is repeatedonly at long intervals, is an investment.
If, on the other hand, the expense is repeatedannually or more frequently – as is typically the casefor agricultural extension services or specializedtechnical advisors – it is considered a recurring cost.However, the cost of such services generally is notclosely related to the output of the project. Forexample, the monthly visit of the veterinarian tovisit a cattle herd would not be likely to increase to
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a frequency of every 3 weeks just because thefarmer increases the size of his herd 9. As a result, thecosts are recorded as a general or overheadexpense and not a production cost.
B. Assigning Costs and Income byActivity
In the identification stage (project profile) thesimplifying assumption was made that theinvestment will result in a project with constantactivities during the entire period analysed.
For example, an investment in a poultry operationmay be initially be supposed to produce a certainnumber of birds per year, every year of theproject, without any change. However, real life isnot so simple. The truth is that in many cases, andfor many reasons, project activities are notconstant every year.
One aspect that often changes with time is theefficiency of the production process. Yieldsimprove and losses are reduced. In the poultryoperation, the rate of hatching is likely to improveafter the first year, while greater experience inpoultry management may well result in fastergrowth among the birds, and hence quickerproduction cycles, as the years go by. By year fiveit may be possible to complete a broiler cycle(chick to saleable bird) in only 7 weeks, asopposed to the 10 weeks required at the start.
Another change may arise from new or modifiedproject activities. The poultry project maycommence turkey production as from year four, thusadding a new activity. A dairy plant may wish toexperiment with ice cream and yoghurt production,but not until the butter and cheese operations arewell established and running smoothly.
Still another possibility is that the costs andincome associated with the activity will not remainconstant. Growth and mortality rates for chickens,
and hence the costs and income from a poultryoperation, may well differ between the summerand winter months. Tomato production in the drysummer months may result in higher costs(irrigation), but higher yields, lower losses (fewerpests), and better prices in the market, than therain-fed tomato produced on the same land in thewetter winter months.
In all of these cases, it is not possible to talk of aconstant pattern of production. Rather,production patterns will change over time, andperhaps seasonally as well.
When dealing with activities in which theproduction cycle extends over more than one year(for example, tree crops or dairy cattle) suchchanges in the production model over time arenot only possible, they are inevitable. A plantationof avocados presents different costs and incomesas a function of its stage of development. As thetree grows from a sapling to a mature tree, theamounts of fertilizer, labour requirements forharvesting, and of course the income from theyield of fruit, will all change.
And if different plots are planted, or young stockpurchased, in different years, the result will be aseries of very complex changes, as the project willconsist of a mix of new, young, and matureanimals or plants which changes from year toyear. As a result, in the detailed analysis ofproductivity it is essential to clearly define thechanges in the costs and income of the projectwith the passing of time. This is the purpose ofusing blocks.
However, the use of blocks is not necessary in allcases. Most non-income generating projects, aswell as lacking changes in income, tend also tohave simple patterns of production, where manycosts are fixed, and activities are few. As a result,blocks are used exclusively for incomegenerating projects.
1. The Concept of Blocks:The Basic Unit of Analysis
A block is defined as any grouping of plants,animals or other production units that share thesame costs and income per unit of production.An activity (for example the production of maize)may be the same as a block, but not always. Thus,summer maize may fall into a different block fromits winter counterpart, if the costs and incomeper hectare are different, although it may be thesame variety of corn in both cases. By the sametoken, a blouse and a shirt manufactured in agarment workshop may be quite different, butboth may be considered in the same block, if thetwo pieces require the same amount of materialsand labour and if they are sold at the same price.
9 However, the cost of inputs and materials used by the veterinarian – medications, drugs, etc. – can be considered asproduction costs, because they will change according to the number of animals treated.
In some cases a proposed investment will buildupon an existing activity – for example addingan irrigation system to an existing productionoperation, or upgrading machinery in a foodprocessing plant. In these cases it is importantto distinguish between total costs and income,and those that are additional or incrementalto the project. Including all costs, includingthose presently paid, or all incomes, includingthose presently received, in the calculations forthe new project, will give a wrong impression ofthe profitability of the proposed new activities.The question of incremental project activities isdiscussed in more detail in Chapter 9.
Incremental Costs and Income
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The blocks don’t always have to group physicalthings. For example, in an eco-tourism project,the block might be visitor/nights, while in atransportation project, the block might bepassenger/miles. Once again, however, avisitor/night in a double room would not be in thesame block as a visitor/night in a single room,because the income (and possibly the costs)would not be the same.
The unit of production, whether it be a hectare ofcitrus trees, a dairy cow, or a hotel room, may notstay always in the same block. A calf might be in ablock of new-born cattle for its first year, but it willthen move to the block of juveniles in the secondyear, before entering the mature dairy cow blockin its third year. After that, the animal might stayin this block until it is sold in its tenth year.
Although the concept of blocks might seemcomplicated at first, it is a powerful tool foridentifying and fine tuning the productionpatterns when changes take place from year toyear. It is particularly useful for investmentsdealing with permanent crops, breeding animalsand dairy production. The main problem for theuser lies in the exact definition of the blocks in aspecific case. The following points might help indetermining what is or is not a block:
c All production units in a block (hectare,head of cattle, kilo of cheese, pair of shoes,etc.) will always share the same costs andincome per unit. If those costs and incomediffer, it belongs in a different block;
c A project activity may be represented by assiinnggllee bblloocckk (if there are no changes in unitcosts and incomes over the period analysed),or mmaannyy bblloocckkss (where the activityexperiences changes in per unit costs andincomes over the period analysed).
c In the case of agricultural production, it isnot necessary for the areas to be physicallyconnected to each other. Two hectares ofcereals may be in the same block eventhough they are growing on different partsof the farm (or even on different farms, ifthey are in the same project);
c Breeding animals or perennial crops (forexample, a cow or a mango plantation) willmove from one block to another as theydevelop (and their costs and incomeschange);
c Do not confuse the age in years of a projectwith the age of the plants or animals.Although a project may be in its fifth year,the almond trees may have been plantedonly three years ago;
c As all production activities involving naturalresources (animals, crops, trees, etc.) willvary both between individuals and betweenyears, it is theoretically possible to define analmost infinite number of blocks. Eachcoffee bush could be its own block. For thepurpose of analysis, however, it is enough togroup together those that are similar, evenif they are not identical. For example, itwould be possible to assign a block to eachyear of a dairy-cow’s life, as milk yield slowlygrows and then declines, resulting inperhaps ten blocks. In reality, however, thedifference between the milk yield (andcosts) once a cow has had her first calf aresmall, and a single block may well suffice tocover the years 3-8 or even 3-10.
2. Determining costs and income per block
In order to construct a model of the overallperformance of a project over time we need toknow three pieces of information about eachblock. These are:
c The costs and income per unit of production(e.g. a hectare) within each block;
c The timing of costs and income per blockthroughout the year. This tells us when costsare incurred (and hence the need foroperating funds), and when income will beearned, and;
c The expected variation from year to year in thenumber of units per block (e.g. 20 breedingewes this year, 25 next year), and hence thescale of the costs and benefits associated witheach block in any particular year10.
As we have seen, if the project is simple (withoutany change of characteristics during the period ofanalysis) the blocks will be equal to the products(that is, tomatoes may have only a single block),and annual production levels may remainconstant from year to year.
Each block requires these three tables. Thus aperennial crop with blocks for each stage of itsgrowth and production requires several sets oftables. For this reason, before considering blocksin further detail, we must carefully examine twokey associated parameters: the unit of productionand the production cycle.
a. The Unit of Production
The definition of the unit of production is criticalbecause it will determine the manner in which
10 The need to estimate annual changes in production levels per block derives directly from a basic decision in RuralInvestto assess project performance on an annual basis (a standard practice in the financial world). Six monthly or evenquarterly analysis periods could also be used, but would require considerably more work. In fact, monthly changes arerecorded for the first year to determine working capital needs.
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costs and income are measured. In many cases,the unit of production of a block or product isobvious. Generally, crops are measured byhectare, acre or other measurement of area. In thiscase, the use – and cost - of inputs (fertilizers,labour, etc.) can be calculated per hectare, and socan the yield at harvest. In the case of largeanimals, the unit may be the head, the breedingfemale, or the Livestock Unit.
However when dealing with other activities, thenature of the unit of production is not always soclear. In this case one must follow the rule that tthheeuunniitt ooff pprroodduuccttiioonn iiss tthhee mmoosstt ccoonnvveenniieenntt uunniitt ffoorreessttiimmaattiinngg ccoossttss aanndd iinnccoommee. For example, in thecase of an aquaculture project, the unit could be theentire stock of fish, the pool or tank or even theindividual fish, depending on which measure is moreconvenient when thinking of costs and income. If thefarmer is more used to thinking of feed per tank offish, then the tank is the obvious choice. However, ifhe or she thinks instead of the costs per fish sold, theindividual animal may make the better unit.
A word of warning here: TThhee llaarrggeerr tthhee uunniitt ooffpprroodduuccttiioonn tthhee lleessss eeaassyy iitt iiss ttoo mmaakkee cchhaannggeess iinntthhee pprroodduuccttiioonn lleevveell. If the unit of productionselected for a proposed fish farm is the tank (withan average of 5,000 fish), then you will beconstrained to increases (or decrease) productionlevels by 5,000 fish at a time, or starting usingfractions of a unit of production (0.5 of a tank, if anew tank will have only 2,500 fish). Size may notbe a problem if the project uses standard sizedunits, but an overly large unit of production canbe very inconvenient.
In the case of agro-industrial products orhandicrafts, the unit of production is frequentlyequal to the uunniitt ooff ssaallee; the piece of clothing, thekilo of cheese, the box of jars, etc. When dealingwith services (hotels, transportation, etc.) the unitof production might be the passenger (orpassenger/kilometre), the guest or the hour ofmachinery service. But remember: Once the unitof production has been selected, all costs andincome must be expressed in terms of this unit.
A family has just bought a 20 hectare coffeeplantation, consisting of 11 hectares of matureplants, 5 ha of old bushes, and 4 ha of coffeeplanted one year before. Although the plantsare dispersed around the farm, all of the areaswith mature coffee plants are bearing fruit andusing resources (agro-chemicals, etc.) on a fairlyuniform level; that is, all share the samecharacteristics of costs and income. The oldbushes are over 25 years old, and give loweryields than the mature plants. They also require
more agro-chemicals to control diseases thanthe younger plants, so they form a differentblock. The newly planted bushes, which requirecare but, as yet, bear no fruit; constitute a thirdblock. Of course, no plant is identical to itsneighbour, and no area of the coffee farm isexactly the same as any other. However, thethree blocks form groups of broadly similarplants. In the table below is a summary of theblocks in the first year of the project.
To determine how each block changes from yearto year, more information is needed about thecharacteristics of the blocks and the family’s plans:
a) The family decide to replace half of the ‘oldplants’ block in each of the first two years ofthe project (that is 2.5 has. per year);
b) The ‘new plants’ block contains plants inboth their first and second year of life. Thatis to say, the costs and income associatedwith plants in these two years are similar 11;
c) All of the areas within the ‘new plants’ blockwhen the farm is purchased are in theirsecond year of life;
d) None of the mature plants will move into theblock of old plantings within the next five years.
Under these assumptions, we can predict thenumber of hectares of coffee plants in eachblock over the first four years of the project:
DEFINING BLOCKS ON ACOFFEE FARM
11 In reality, coffee bushes do not pass directly from newly planted to mature in their third year, but the example hasbeen simplified.
BLOCK
New plants
Mature plants
Old plants
UNITS
4 has.
11 has.
5 has.
CHARACTERISTICS
Low maintenancecosts, withoutyields or income
Medium costs(including costs forharvesting). Highyield and income.
Relatively highmaintenance costs,Yields and incomeonly moderate.
BLOCK
Newplantings
Matureplants
Oldplants
Total
HectaresYear 1
4
11
5
20
perblockYear 2
2.5
15
2.5
20
perprojectYear 3
5
15
0
20
YearsYear 4
2.5
17.5
0
20
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b. The production cycle
The definition of the production cycle is importantfor the same reasons as the definition of the unitof production (above) - it determines the wayinputs and yields are measured. When we speak ofthree 50kg sacks of fertilizer per hectare, we referto the entire growing period of the crop, orproduction cycle, not per week or every 5 years.However, to properly understand the productioncycle we need to know two things about it: howlong it lasts (its duration) and how many cyclesthere are per year (its frequency) .
Duration of the production cycle: The durationof a production cycle is simply defined as theperiod necessary to complete the productionactivity. For most annual crops, it is the timebetween land preparation and harvest; perhaps12 – 14 weeks for short cycle crops, such asvegetables. Grain and legume crops such as rice,maize and beans will generally require longer.
In some cases, however, this simple definitionmust be modified. Remember that all analyses inRuralInvest (except working capital) areundertaken on a yyeeaarrllyy basis. Thus costs andincomes from an activity can not be calculated ona longer base than one year. As the productioncycle is a key parameter or input in calculatingthese costs, the production cycle must not exceed
12 months either, even if the life of the entireactivity – for example, a fruit plantation – spans 20years or longer.
Beyond agriculture, a different problem can beencountered in trying to define the duration ofthe production cycle. Many activities, such ashandicrafts, agroindustry, transportation, tourismand other businesses continue operatingthroughout the year, without a clear beginningand ending point for production. In this caseseveral options are available. One alternative is toselect the entire year as the production cycle.However, many costs (salaries, electricity,telephone, etc.) are typically paid monthly, so itmay be more convenient to define the cycle asone calendar month. Alternatively, if the plant orworkshop delivers the product for sale on, say, atwo weekly basis, it might make sense to selecttwo weeks as the product cycle duration. In theend, the choice may not matter very much, aslong as the period is convenient and you areconsistent in always measuring the inputs andoutputs over the same period for each activity.
Frequency of the production cycle: Wementioned previously that RuralInvest uses anannual basis for almost all calculations. So it is notenough to know how long each production cyclelasts; we must also know how many cycles arecompleted in the year under analysis. For activitiesthat are continuous throughout the year, theanswer is simple: the duration of each cycle (inmonths), multiplied by the frequency of the cycles(also in months) will add up to 12. Thus, if theproduction cycle of a rural shop lasts one month,there will be 12 cycles per year.
However, not all activities continue throughoutthe entire year. In agriculture and other types ofactivities based on natural resources, there willoften be periods in which no production isoccurring. Although the production cycle of acrop may last 4 months, it is not at all guaranteedthat there will be three cycles a year (producing 3cycles x 4 months = 12 months). Even two cyclesmay depend upon the availability of irrigation. Bythe same token, a vegetable processor mightdefine his production cycle as one month, but hisor her plant may only operate for 5 or 6 monthsper year, due to the lack of raw materials in othermonths.
c. Estimation of volumes and quantities
Even with a very careful estimation of the amountsused or generated in the process of production,mistakes frequently occur in these measurements.Below we consider two factors that often cause errorsin the estimation of input and output quantities.
Waste materials and losses: One factor which isfrequently overlooked in estimating quantities is
How did we arrive at the second table? The firstyear is the same as the first chart. But in thesecond year, we take away half of the oldplants, leaving only 2.5 has. in the block andestablish in its place 2.5 has. of new coffeeplantings.However, these new plantings are now theonly ones in their block because the 4 ha ofprevious ‘new plants’ being already in theirsecond year, have "graduated" to the block ofthe mature coffee plantings. The maturecoffee plants now number the original 11 haplus the new 4 ha. NNoottee tthhaatt tthhee nnuummbbeerr ooffuunniittss ((hheeccttaarreess iinn tthhiiss ccaassee)) iinn aa bblloocckk ccaanncchhaannggee aanndd nneeeedd nnoott bbee eeqquuaall ttoo tthhaatt ooff tthheepprreevviioouuss yyeeaarr.
In the third year of the project the rest of theold areas (2.5 has.) is replaced, leaving the ‘oldplants’ block empty. In its place a further 2.5ha is added to the ‘new plants’ block. Thisblock now consists of 5 ha because the other2.5 ha planted the previous year are not yetold enough to graduate to the mature block.The mature coffee block thus continues with15 ha. The reader can work out the area ofplants per block for the fourth year of theproject on his own.
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that of losses, damaged goods and waste, all ofwhich are a normal part of many productionoperations. If 8 tons of green or sweet peppers areharvested in the field, it is highly unlikely that all 8tons will be sold. A certain percentage will berejected as too small or bruised, anotherpercentage will be damaged in transportation tothe point of sale, etc. It is very important to takethese sorts of losses into consideration if you wanta reliable estimation of costs and income. Lossescan also occur with respect to inputs. If you arebottling wine, it would be wise to assume thatsome of those bottles will be broken, and order asmall additional quantity to cover such breakages.
Another example is the conversion of fruits andvegetables in a processing plant. Take, forexample, a vegetable processing plant makingpickles. We can imagine that each bottle offinished product requires around 120 grams ofcauliflower, as well as carrots, zucchini, and othervegetables. However, it would be a bad mistake toestimate the requirement for cauliflower bymultiplying the projected number of jars of pickleby 120 grams. In reality, about 40% of eachcauliflower will be lost, as the stalk, leaves, anddamaged sections are discarded as the caulifloweris prepared. In order to end up with 120 grams ofcauliflower ready to use, you would thus need tobuy approximately 200g for each jar of pickle.
Self-supply/auto-consumption: Another elementthat may cause confusion is that related to thesource of inputs or the destination of products.Sometimes a project makes use of inputs that arenot paid for, typically because they come from thesame persons or families as own the project. Thisis called self-supply. A very common example inmany rural activities is the use of unpaid familylabour. Other ‘free’ inputs can include rawmaterials for processing, or even water, can alsooften be found. It is important to realise that theseinputs, even if not paid for, still have a value. Evenif he was not paid, a day’s labour provided by yourbrother could have earned him a wage workingon a neighbouring farm.
Similarly, if outputs are consumed on-farm (or bythe owners of the project) without being paid for– for example grain is eaten, or kept for seedrather than being sold - this is auto-consumption.Here the reverse applies. Even though the familydid not pay for the crops or animals they eat, theystill had a value, one that could have been gainedby taking the crop or animal to the nearestmarket.
The occurrence of either auto-consumption or selfsupply can lead to important differences in theresults obtained from the two principal projectmeasures used by RuralInvest. These are discussedin more detail in Chapter 9, but in cash flowanalysis, ‘free’ inputs and consumed products are
ignored, as the analysis deals only with cash.However, in financial terms, they must be takeninto account, because financial analysis tries toaccount for all costs and benefits with a marketvalue, even if it isn’t paid. After all, if you consumesomething instead of selling it, you do not reducethe profitability of the operation, but you do affectyour capacity to generate cash flow: a key aspectfor the bank or financial agency when consideringthe possibilities of a loan.
When estimating costs, is it important to considerthe value of auto-consumption or self supply?Normally, you should identify the cost (for selfsupply inputs) or the price (for auto-consumptionof outputs) at the nearest market - adjusted by thecost of transportation, if it is at some distance –and use that figure for the financial analysis.
3. The importance of the project’s first year
The first year in the life of any project is the mostdelicate and risky period. If a project is going tofail, in nine out of ten cases, it will do so in thisperiod. Why? Because the first year of a project isthe least secure; the employees are as yetunaccustomed to their duties; the management isless experienced; the suppliers and banks are morecautious; the buyers are less accustomed to theproduct.
More important, however, is the fact that duringthe first year of its life, a project typically lacks thereserves to absorb any setbacks or unexpectedevents. The lack of adequate resources forfinancing activities such as the purchase of rawmaterials, the payment of salaries or the cost oftransporting finished product to the market caneasily throw a new project into bankruptcy. Toreduce this risk, it is necessary to deal with the firstyear of a project’s life differently from other years.
4. Estimating the need for working capital
The lack of adequate operating funds hasprobably condemned more small projects tofailure than any other factor. It is always necessaryto calculate the needs for wwoorrkkiinngg ccaappiittaall; that is,the funds needed for the project to pay itsexpenses in cash, until it has accumulated enoughcash reserves to rely on its own resources. Manysmall projects begin operations relying on incomefrom sales to pay their bills. But they haveforgotten that, in the real world, it may take manymonths to obtain the payment you expect.However, especially when dealing with a newbusiness, the gasoline station, project employees,and the feed or fertilizer salesman, will all demandto be paid in cash.
In general, working capital is required to cover allproject expenses incurred as cash payments, from
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the moment the expenditures begin until thefunds are received from the sale of the finishedgoods or products. The stages of this periodinclude:
a) Preparation for production, includingactivities such as: buying inputs (even if notyet delivered), preparing the soil; trainingemployees; contracting the transport, etc.
b) The production period. This may be a shortperiod (making a shirt, the production of akilo of cheese) or long (growing a crop) butiitt ccaann nneevveerr bbee lloonnggeerr tthhaann 1122 mmoonntthhss, forpurposes of calculating working capital
c) Storage. You may be able to make a shirt in afew hours, but perhaps the finished shirts areonly shipped to the wholesaler once a month.Sometimes, non-perishable products can stayin storage for months waiting for better prices.
d) Transportation and distribution. This may bea short period, but in the case of crops orother products for export by ship, it couldmean a wait of several weeks.
e) Waiting for the buyer to pay. While selling ina market generates immediate cash, this canbe the longest wait of all. Supermarketsfrequently delay payment for up to 60 daysand large agro-industrial plants sometimesfollow the same policy.
f) Clearing payment. Cash is immediatelyavailable, but do not forget that banksfrequently demand several days beforecrediting a cheque, and perhaps weeks if thepayment comes from another country.
g) Accumulating reserves. Working capital willbe needed not only to cover the periodsdescribed above, but also while the project isaccumulating enough surplus to allow anyoperating loans to be paid (if you have one),and then reserves equal to the entire workingcapital needs.
The combination of all these factors can bringabout a delay of many months, or even years,before the project ceases to require borrowedworking capital.
5. Cash Flow
In the previous discussion, it was proposed thatonce the project begins selling its output andreceiving income, it will be able to establishworking capital reserves. However, this is notalways true.
Some production processes are constant and thusworking capital is readily accumulated. Forexample a workshop making shoes may face the
same expenses every month, and can graduallybuild up working capital reserves from the marginearned each month (once money starts to flowin). Other business, however, are seasonal; inother words, there are only sales of the productduring certain months, or the volume ofproduction varies significantly from month tomonth. In other cases, you may have more thanone product, each having its own costs, incomeand working capital needs.
For example, let us look at the production of asingle product; tomatoes. We know that toproduce one hectare, we will need $500 in localmoney in working capital to cover the four monthperiod, from land preparation in February to theend of the harvest in May. As we have used up allour resources installing the irrigation system, wetake a loan for the $500. However, when we sellthe tomatoes in May and June we will earn $800,leaving us with a profit of $300 towards theworking capital in our next cycle (less the interestpaid on the loan). Unless we need the money forother purposes, we will need a loan of only $200next time.
However, if the project will cover several differentactivities – say tomatoes, squash and beans – thesituation becomes more complicated, because wemust know the relation between the costs andincomes of each activity. The only adequatesolution in these cases is to calculate exactly howmuch we must pay in expenses and how much wewill receive in income for the three activitiescombined: this is the monthly cash flow.
With the generation of a cash flow chart theworking capital needs become clear. In thefollowing chart, we can see the monthlyproduction costs for tomato, mentioned above,during the period from February to May ($125 permonth, or a total of $500). Income from the saleof tomatoes starts with $400 in May and isfollowed by a further $400 in June. However,these amounts may not be received until late inthe month, so they are only credited in the nextmonth (that is June and July). All income is bestcredited in the next month, as expenses in amonth may well become due before the income isreceived.
There are further complications. In May theproject will also face costs of $100 arising from thestart-up of squash production. Thus borrowingrequirements will reach a maximum of $600before income starts to come in from the sale oftomatoes. Even then, the project will still be short$300 until the next month, when the remaining$400 from the tomatoes enters the bank.
The chart also shows that the total amountreceived from the sale of tomatoes ($400 + $400,or $800) is not enough to pay both the working
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capital loan for the tomatoes ($500) and, at thesame time, cover the costs of squash production($350). So, although the project breaks even inJuly, it will need still more funds to covercontinuing production costs for the squash inAugust. If the working capital loan for thetomatoes was paid-off in July, the project wouldhave to borrow further funds. Rather, it isnecessary to wait until September before clearingthe working capital loan. On the positive side, thecombined profit from the tomatoes and thesquash will be sufficient to cover the costs of thebeans, although available cash will be reduced toonly $350 by the end of the year.
Some readers may ask why the costs and incomefrom beans for the months of January throughApril do not enter into the calculation. If youthink about it, the answer is clear: the productioncycle for beans doesn’t start until September. Ifthe project commences in January, as it does inthis example, it is impossible to have costs (orincome) for beans in the early months of the year,as they could not have been planted the previousSeptember!
The chart shown here is simplified and lacks someof the elements that would have to be consideredin a real analysis. For example, the costs shownabove reflect only the production process itself.Any project will encounter other costs – both
general and fixed – that need to be paid duringthe first year of operation (like electricity, realestate taxes, family sustenance, the manager’ssalary, etc.). Therefore, an extra row is normallyinserted below to include general costs. Butremember: only include cash expenditures in thecash flow.
It might be that the net income predicted for theend of the first year is negative (for example,owing to perennial crops that do not yield in thefirst year) or, although positive, isn’t sufficient tocover the costs in the second year (as in theexample above). In these cases, working capitalloans would be needed in a second and perhapseven a third year. However, in general it is notnecessary to lay out a cash flow for each year. Ifcosts and income in the second year are similar tothose of the first year, you can simply repeat theworking capital needs of the first year in thesecond.
It is not usually necessary to prepare cash flowprojections for projects with one simple activity, orfor very small projects. However, for those withmultiple activities, or for larger projects, they areusually essential. In any case, RuralInvest providesa completely automated cash flow projection, sothe monthly cash flow chart is generated directlyonce the data on costs and expenses have beenentered for each block.
Aug
50600
-50-50
Jul
100
3000
Dic
50
-50350
Jun
400
100
300-300
May
125400
100
-225-600
Apr
125
150
-125-375
Mar
125
150
-125-250
Feb
125
150
-125-125
Nov
50
-50400
Oct
50
-50450
Jan
50
00
Sept
50
550500
Tomato: Costs per month
Income per month
Squash: Costs per month
Income per month
Beans: Costs per month
Income per month
Montly balancecumulative total
ACTIVITYCOSTS AND INCOME BY ACTIVITY OR BLOCK
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Chapter VII
FINANCING THE INVESTMENT
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VII FINANCING THEINVESTMENT
A lthough there are a number of ruralinvestment funds directed solely at non-profit
investments, the majority of financing provided tocommunities and individual applicants in the ruralsector also contemplate the financing of activitiesthat generate income; that is to say, profit-oriented activities. Although they might receivesubsidies, investments in income generatingprojects almost always require that the recipient(s)accept part of the cost of the investment in theform of a loan.
In this section, we characterize the different needsfor reimbursable (or repayable) financing anddiscuss the loan features that can influence thecost of financing.
A. Credit Requirements
Credit or loans are required to finance two basiccosts, and can be calculated as follows:
c Investment Loans: The total cost of theinvestment less (i) any grant funds offeredby the supporting agency; (ii) donationsfrom other sources (e.g. NGOs,government, churches etc.), and (iii)personal resources provided by theapplicants.
c Working Capital: Funds to cover operatingexpenses (as defined in Chapter 6) lessdonations and personal resources.
The availability of donated funds will depend onthe supporting agency and its resources. In manycases, in addition to covering the cost of the fieldtechnicians assisting in the preparation of theinvestment proposal, grant funds are alsoavailable to reduce or eliminate the cost to theapplicants of human resources and systemsdevelopment (training, designing accountingsystems, etc.) and for environmental studies andmitigation measures. In some cases, a supportingagency may offer grants or subsidies forinvestments in what are called ‘common goods’ –that is items that can be used by a wide range ofpeople, such as access roads, water collectionworks, etc. Less frequently, a supporting agencymight subsidize the cost of productiveinvestments or working capital for the operationof these investments.
One warning about the excessive use of donationsand subsidies: Although they might appear to bevery attractive to the applicant, he or she must be
careful to ensure that tthhee pprroodduucctt wwoouulldd ccoonnttiinnuueettoo bbee ffeeaassiibbllee oorr pprrooffiittaabbllee eevveenn iiff tthheessee ggrraannttss oorrssuubbssiiddiieess wweerree nnoott aavvaaiillaabbllee. Why? Because whenthe time comes to replace the investments, theproject may not be able to cover these new costsand can fail. Thus there is a real risk of undertakingan unsustainable project.
Although the question of financial feasibility tendsto apply more to income generating projects thanto social or environmental investments, it shouldnot be forgotten in these cases, either. For thesenon-income generating projects, donationsfrequently cover most, if not all, the investmentcost. When the time comes to repair the roof, orreplace the furniture, there are simply noresources available to cover the cost.
A certain level of personal contribution on the partof the applicants is important, and is generallyrequired by the financial agency. A significantcontribution of personal or community capital (incash or kind) demonstrates the borrower’scommitment to the project, and insures that, if itfails, the borrower will also suffer from the loss ofhis or her own capital.
1. Financing for investment
Investment financing normally occurs throughsingle credit with a loan duration of 4 to 5 years orlonger. Typically, in small and medium sizedprojects, a single loan is obtained to cover thetotal amount. However, in larger projects, it maybe wise to split the cost of the investment into twoamounts, especially if land is purchased. One loancan cover either land or other long terminvestments with long life spans (structures, heavymachinery, etc.). The second can be used forinvestments with short to medium life spans(vehicles, electronic equipment, etc.). On thisbasis, two loans would be requested, each with adifferent payback period, and probably interestrate.
It may also be the case that the financing agencyimposes limitations regarding the type of itemsthat it will consider, (for example, it might notallow loans to finance the purchase of vehicles). Inthis case it might be useful to divide the financinginto two parts: the majority of the costs to befinanced would be covered by the supportingagency, while alternative sources (e.g. commercialbank, cooperative, savings and loan association,etc.) would be sought for the financing of theexcluded items.
2. Financing working capital
Loans for financing working capital are alwaysshort term. They may be ‘rolled over’, or renewed,from one year to the next but are rarely extended
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beyond one year. Thus, if there is a need tocontinue to use external financing for workingcapital in the second year, it would be morecustomary to pay off the current year’s loan at theend of the year, and then obtain a fresh one forthe following year.
This short term nature of working capital loansaffects the way that the loan is recorded in theaccounts of the project. Given that the loan isboth rreecceeiivveedd and then ppaaiidd bbaacckk within the sameyear, tthhee oonnllyy eelleemmeenntt ooff aa wwoorrkkiinngg ccaappiittaall llooaanntthhaatt aappppeeaarrss iinn tthhee aannnnuuaall aaccccoouunnttss iiss tthhee iinntteerreessttccoosstt ooff tthhee llooaann. The actual loan amount willneither appear as an income nor as anoutstanding capital debt as would be the case foran investment loan – only the interest paymentremains. This is illustrated below in comparisonwith an investment loan.
B. Loan Characteristics
It is impossible to carry out a financial analysis ofan investment without defining some of the keycharacteristics of the loans involved. Among thesefeatures, the most important are the interest rate,the grace period and the duration of the loan.
a) Interest rate
Interest rates will be determined by the financialagency that supports the investment. In somecases, these rates will be subsidized. Normally, theinterest rate for a medium or long term loan (forinvestment) will be different from the rate for ashort term loan (working capital). As RuralInvestworks with constant costs and prices, real – ratherthan nominal – interest rates should be used formedium and long term loans. The importance ofthis, and why it is done, is discussed in more detaillater in this Chapter.
b) Grace period
A grace period is the time during which theborrower need not make payments on his loan. Itis common for even commercial banks to offer
grace periods for medium and long term loans,but it is rare for them to do so for short termcredit.
There are two types of grace period. The firstrefers only to the payment of the loan capital. Thisis the most common. During the grace period onprincipal, interest is fully paid by the borrower butthe principal (or capital amount) remainsuntouched. Thus after one year, the borrowerowes the same amount as at the beginning. Thesecond type of grace period refers to interest. Inthis case, the interest is not paid, but instead isadded to the principal, thereby increasing thetotal amount of the loan. Grace periods oninterest are less common than on the principaland, if offered, tend to be shorter. A bank or otherlender may, however, offer to provide six monthsor one year’s grace on interest where it is clear thatno income will be generated in the first months ofthe project.
It is important to understand that neither of thesetwo types of grace period signify the forgivenessof any part of the loan. They only postponepayment, and where interest payments are notmade, will actually increase the size of the debt.
$ 2,000
$ 400
$ 200
$ 1,600
$ 200
$ 200
$ 20
$ 0
Borrowed at thebeginning of theyear
Principal repaid atthe end of the year
Interest paid(at 10%)
Principaloutstanding
Amounts Loan WorkingInvestment Capital
The managers of a small business finally decidethat the time has come when they can nolonger survive without a computer to keep theiraccounts straight and to prepare their invoices.They determine that a computer (with itsprinter, software and other necessities) will costan equivalent of US$5,000. They estimate thatthe equipment will have a useful life span of 4years and will have no significant resale value atthe end of its life. If the rate of interest on theloan is 10% per year, what will be the impact oftaking out a US$5,000 loan for 2, 4, or 6 years?
2 years 4 years 6 years
Annual Payment: 2,881 1,577 1,148
Total Payment: 5,762 6,309 6,888
You can see that the annual payment is almostdouble for the two year loan compared to thefour year package; that is, although the totalcost of the loan for 4 years is US$547 more thanthat of the 2 year loan (because interest is paidover a longer time period), the annual cost isUS$1,300 less. The 6 year loan is even cheaperin annual terms: only US$1,148. However, atthe end of the fourth year, when the computermust be replaced, the company will still oweUS$2,300 and must now also finance the costof replacement.
FINANCING THE PURCHASE OF A COMPUTER
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c) Duration of the loan
The ideal loan is one that lasts just as long as theitem being financed. However, in real life, loansare used to buy a series of goods, each with itsown life span. So, you must define a period thatcovers the majority of the investments; especiallythe most important of them, in terms of cost.
If the loan has a shorter term than the life of thearticle being purchased, the project will have tofind a larger amount each year in order to pay itoff quickly. However, if the loan lasts longer thanthe item, the project could find itself in a positionwhere it is starting a new loan to finance areplacement, while it has still not yet finishedpaying off the original loan (see box).
In any case, the life of a loan for investmentsshould not be longer than the period of analysis ofthe project. If the nature of the goods and theproject itself justify a 20 year loan, then it isnecessary to analyse a period of 20 years.
C. The Changing Value of Moneyover Time
As we mentioned earlier, a possible definition of aproject is "an investment today in order togenerate a flow of benefits in the future".However, this difference in time – the investmenttoday and the benefits tomorrow – causescomplications. We all recognize the fact thatsomething received in the future is worth less thanthe same thing received right now. For this reason,it is not possible to say that a project is feasiblesimply because its future income is greater thanthe present investment. Everything depends onthe relative value of the money (or other benefits)today and in the future.
Below, we will consider the impact of time on thevalue of money and describe how to take this factinto account when analysing an investment.
1. Inflation and Future Value
When we speak of the difference between moneytoday and in the future, many people immediatelythink of inflation.
It is true that when there is inflation, the futurevalue of money is less, as a consequence of the risein prices. However, tthhee mmeetthhooddoollooggyy uusseedd bbyyRRuurraallIInnvveesstt aatttteemmppttss ttoo eelliimmiinnaattee tthhee iimmppaacctt ooffiinnffllaattiioonn bbyy ccaallccuullaattiinngg aallll ooff tthhee eelleemmeennttss ooff tthheepprroojjeecctt iinn tteerrmmss ooff ccoonnssttaanntt pprriicceess. That is to say, itis assumed in the analysis that the prices of allgoods, inputs, labour, products, etc. will stay thesame during all of the years analysed. Thus, if a
day of work in the workshop or school costs $2.50in the first year, it will cost $2.50 throughout theperiod of the analysis, even if it is 20 years.
How is it possible to do this? The answer is thatalthough it is probable that the costs will rise withthe passing of the years, the prices received forthe sale of the products will also rise. So the rise incosts will balance out the increase in income, andthere will not be a significant distortion in theresults 12. Excluding inflation from the calculationeliminates the need to calculate new costs andprices for each year of the analysis, an exercise thatmay well be justifiable in projects involving multi-millions, but not in small or medium sizedinvestments.
However, inflation is not the only factor thatmakes something in the future less valuable thantoday, and entices us all to prefer something nowthan in an uncertain future.
According to The Economist magazine, prices inEurope in 1914, at the beginning of the FirstWorld War were not, on the average, higher thanthey were in the 17th Century; that is in 200 yearsthere had been no inflation. But the banks inEurope continued offering positive interest ratesfor deposits during this entire period, althoughoften no more than 2 or 3% per annum. So, evenwithout inflation, people demanded somecompensation (the interest rate) for waiting untilthe future to have their funds.
Below we discuss what factors influence interestrates in the absence of inflation.
2. Constant Prices and the Real Interest Rate
If constant prices are to be used for inputs andproducts, they should also be used for the cost ofmoney; that is, the interest rate, as interest ratesare heavily influenced by inflation, both actual andexpected. For medium and long term loans,therefore, the model used by RuralInvest deductsthe current inflation rate from the ‘nominal’interest rate (that is the one paid by the client),thereby leaving a "constant" or "real" interest rate.
The question of real interest rates on loans is thearea which presents RuralInvest users moredifficulties than perhaps any other. To understandhow inflation affects the interest rate, let usconsider the different elements that combine todetermine the rate charged by a lender (bank,cooperative, project, etc.):
a) The initial cost of the funds: the price that abank or other lender pays the deposit holderswhose money they use;
b) The cost of administering the loan: this iscommonly the highest cost for small loans, as
12 In fact, in the absence of very different inflation rates among the different elements of the project, probably the mostimportant impact in using constant prices found in the underestimation of the needs for working capital.
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it takes almost the same time to process aloan for $500 as it does for $500,000;
c) The risk of loss or delays in payment: thisvaries with the kind of security offered by theclient and how well the bank knows theclient;
d) The profit margin required by the bank:the part of the loan cost that generatesprofits for the bank.
Expectations concerning the inflation rate over thelife of the loan clearly influences at least two ofthese elements – the cost of funds and the bank’sprofit margin. To compensate for any decrease inthe value of funds due to inflation (either thebank’s own funds or those of its depositors), thebank will have to increase these two elements,increasing the overall interest rate.
Where inflation rates are significant, there can bea major difference between nominal and realrates. In fact at very high inflation rates, realinterest rates will often drop below zero, becauseit takes some time for people to believe thatinflation will stay so high into the future.
It is very important to be clear about one thing.The use of a ‘real’ interest rate (that is one thatexcludes inflation) helps us to determine theunderlying feasibility of the project – iitt ddooeess nnootttteellll uuss hhooww mmuucchh tthhee pprroojjeecctt wwiillll ppaayy eevveerryy mmoonntthhoorr yyeeaarr ttoo tthhee ffiinnaanncciinngg aaggeennccyy. That is not itspurpose, although a user can get some idea ofthese actual payments by setting the inflation levelto zero in the RuralInvest software. This will force
the computer to make the ‘nominal’ interest rateequal to the ‘real’ rate, and the paymentscalculated will be thus be at the nominal rate.
Even if the nominal rate is used, however, extremecare must be taken in assuming (or even worse,telling the applicants) that the amounts calculatedby RuralInvest are those that the project will payonce underway. This is because there are manyways to schedule repayments, as well as toincorporate associated loan charges. For example,while it is common to equalize payments over thelife of the loan (as is done with mortgages and inRuralInvest), this is not essential, and some lenderswill vary payments according to the amountoutstanding, which will mean high payments inthe early years. Still others will ‘balloon’ paymentsat the end, resulting in low costs early on, buthigh costs towards the end of the loan period. Allinvolve the same interest rates, but result in aquite different pattern of payments. In a similarmanner, some agencies will charge cash for loanservices, while others will add them to the loanamount, or to the early payments, and so forth.Thus, tthhee llooaann ppaayymmeennttss ccaallccuullaatteedd iinn RRuurraallIInnvveessttaarree nnoott aa ggoooodd gguuiiddee ttoo aaccttuuaall ppaayymmeennttss tthhaatt wwiillllbbee ffaacceedd bbyy aa pprroojjeecctt.
In theory, the same method of eliminatinginflation could be used for working capital, but therelation between constant prices and real interestrates is less clear over short periods, because someprices respond more quickly than others. For thisreason, in the case of less-than-one-year loans, themodels use current interest rates, which give us ahigher cost than necessary; but it is consideredbetter to take a conservative position.
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Chapter VIII
ORGANIZATION AND MANAGEMENT OF THE
INVESTMENT
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advantages and disadvantages of registering asmall business in each specific case.
In broad terms, however, formal registration of aproject as a company may bring some of thefollowing benefits:
a) It can facilitate access to formal sources ofcredit (banks, etc.) as well as governmentprograms that support small enterprises;
b) It will often permit the business to reclaimvalue added taxes (VAT) on goods andservices purchased;
c) It may help employees to access statemedical insurance and social welfareprograms;
d) It may give the company the right to importcertain products (for example, packagingmaterials and inputs) tax-free, in those caseswhere the end product is destined for export.
Among the possible disadvantages of registrationare:
a) Bureaucratic red tape, which is frequentlytime consuming and frustrating;
b) The need to maintain a variety of records anddocuments in order to comply with legalrequirements;
c) Responsibility for collecting VAT on sales andremitting it to the fiscal authorities;
d) The possibility of attracting more attentionfrom the tax authorities
2. Multiple Owners
When dealing with an activity that involves agroup of persons, or an entire community,further options can be added to those discussedin individual investments (informal andcompany). The most common alternative is theuse of a cooperative structure, although somecountries also offer other types of ownership forgroups.
It is not recommended that cooperatives befounded for the explicit purpose of managing aninvestment. A successful cooperative is the resultof a series of developments involving a number ofcommunity efforts. A process of maturation andlearning is required before a cooperative cansuccessfully take on the responsibility for directingand controlling a project of significant size.However, if the community already has an activeand well managed coop, this may be the mostattractive solution.
Nevertheless, in spite of all their ideals, in manycountries cooperatives have had a disappointing
VIII ORGANIZATION ANDMANAGEMENT OF THE INVESTMENT
T he organizational and managerial aspects ofan investment proposal constitute an area that
rarely receives the attention it deserves. Themajority of effort is generally dedicated tofinancial and technical factors, and very little timeis spent on defining an appropriate and effectivemanagerial structure. As a result, many small andmedium investments - especially those that areowned by groups or communities - fail because ofproblems of control or management.
Rural communities typically do not have manypeople with management and businessadministration experience, and it is risky toassume that these are functions that will solvethemselves, or that their definition can be left forthe stage of project execution. Below, we discussthe three most important factors determiningproject organization and management:
a) the ownership structure
b) supervision and oversight
c) daily management
There is also a brief discussion on the use oftechnical assistance by the management team.
A. Ownership Structure
The first task that is encountered in determiningthe organizational and managerial model for aninvestment is the choice of its ownershipstructure. Typically, there are several availableoptions, including both informal and formalstructures. However, the decision depends to agreat extent on whether the operation orinvestment will be carried out by a single personor family or by a group of persons or families.
1. Individual Owners
In the case of an investment made by anindividual, or a single family, the principal decisionconcerns the necessity and usefulness offormalizing the legal status of the activity byregistering it as a corporation.
This manual offers no guidelines on legal aspects,mainly due to the number of countries in which itmay be utilized. It is therefore the responsibility ofthe people in charge of the process of formulationand evaluation of the investment to determinewhat the legal requirements are, as well as the
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history, and most success stories appear to resultfrom the efforts and dedication of a singledynamic individual. If a cooperative structure isconsidered, therefore, it is necessary to insure thatthere is a firm commitment on the part of itsmembers to make it function adequately.
Should you instead select the corporate structurefor a project that belongs to a group orcommunity, certain key decisions must be maderegarding the nature of the corporation, and it ishighly recommended that a lawyer be consulted ifpossible to ensure that the options available areclearly understood.
One possibility is to issue shares to all of theparticipants, in much the same way that acompany on the stock exchange does. At theend of the year, the company will distribute anyearnings according to the number anddistribution of its shares. In this case, however,the right of the shareholders to sell their shares(and to whom), and the requirement that theyactively participate in the project must beestablished from the very beginning. Forexample, if a community corporation is used as amarketing channel for products derived from onlysome villagers, it may be considered importantthat these participants have the right to increasetheir shares in comparison to those of non-participants.
B. Supervision and Oversight
Any project or operation that manages significantresources, and represents the interests of morethan two persons, requires some form of board orsupervisory committee. Obviously, the size andresponsibility of such a group depends on thescale of the project.
If a small group of families establishes anoperation involving 5 workers, there is no need fora Board of Directors with 12 members that meetsevery month. However, even a small operation, orone that only performs one task (for example,selling the agricultural product of the memberfamilies), needs some kind of oversight. If thisdoesn’t exist, the enterprise runs the risk of misuseof funds or resources by the person or persons thatadminister it.
In the case of relatively small groups, it is possiblethat everyone involved can participate in theduties of direction and general follow-up of theactivity.
When dealing with larger groups, however, it isnecessary to rely instead on the formation of aboard or steering committee. Such a Board willrequire bye-laws, which define matters such as:
a) How many people constitute a committee?We recommend a minimum of 5 and amaximum of 8 or 9 persons
b) How much time can each person serve as amember of the board or committee? Theremay be no limits, but frequently a maximumof two or three years is appropriate.
c) Should the duties of the President, thesecretary and the treasurer be defined? This isgenerally not recommended, except for thesmallest of committees.
d) How often should they meet? This could bemonthly, quarterly or even every six months,according to the scale of the operation andthe complexity of its operations.
e) How frequently should the Board presenttheir report to the other members? It isadvisable to do so once a year.
The supervision of the project can be as importantregarding what it does not do, as for what it doesdo. While a Board of Directors or any supervisorycommittee should play an important role inmonitoring the progress of the project and thestrategic decision making process, it is not anadequate forum for making managerial decisions(and even less so when supervision is theresponsibility of all of the participants). Manyprojects have been destroyed by boards andsupervisory committees that obstruct themanager from fulfilling his responsibilities.
The by-laws of the company, cooperative orgroup, in addition to defining the structure of theboard or supervisory committee should specifythe following:
a) Areas of responsibility of the Director’sCommittee:
c Hiring (and firing) the manager or personin charge of the day to day decisions;
c Review and approve the bi-annual orannual accounts of the project;
c Make decisions regarding thebookkeeping method for the projectaccounts, and the use (if any) of auditors;
c Strategic decisions, such as: types ofactivities to be carried out; approval ofsignificant investments and possibly, thedetermination of employee salaries.
c Call general annual or extra-ordinarymeetings.
c Make decisions concerning thecontracting of external experts to reviewor assist the operations of the project
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c Establish general procedures for selectingsuppliers, contracting personnel andcarrying out other similar activities.
b) Areas normally out of the competence ofthe Director’s Committee:
c Making decisions on production levels(within the range determined by staffinglevels and equipment capacity);
c Buying and selling input materials andproducts (including the determination ofprices and the selection of markets);
c Administrative activities, such as keepingrecords, dealing with bills, invoices andreceivables, and relations with clients andsuppliers;
c Personnel selection (within agreed uponstaffing levels).
It is important that the Board or SteeringCommittee allow the manager of the operation tomanage the activity according to his or hercriteria, and not attempt to dictate day-to-daydecisions. If the committee lacks confidence inthe manager, it must refuse to renew theircontract at the end of the agreed term and seek areplacement. By revoking or changingmanagement decisions, they only destroy themanager’s ability to run the project in an efficientmanner.
Only when the committee finds (or suspects) themanager guilty of illegal activities, or activitiescontrary to the previously established and agreedupon guidelines, should there be grounds for adirect intervention in the activities of theoperation. Even in this case, it is recommendedthat the Board or steering committee seek theapproval of an extra-ordinary general assemblybefore acting.
C. Daily Management
Once the structure and the mandate of thesupervisory and oversight group have beendetermined, project management andadministration needs should be defined.
The smallest of projects may need no more thanone person, responsible for all tasks in both areas.However, it would be a false economy to place allof the responsibility on one person when theproject generates significant costs and income.
A common combination for a small project is ageneral manager backed up by a bookkeeper. Thissecond person may also carry out the duties of
secretary. In a larger operation, the followingpositions may supplement the general manager,according to the types of activities carried out.One of these positions may be the particularresponsibility of the general manager:
c Field manager: in charge of field operationsincluding raw materials and inputsproduction or procurement;
c Plant manager: responsible for all operationswithin the facility, including processing,packaging, storage etc.;
c Sales manager: responsible for all marketingof the finished product;
c Financial manager/Accountant: Responsiblefor maintaining project accounts, dealingwith banks and managing payments andreceivables;
c Personnel officer: responsible for managingemployees including labourers, field hands,secretaries, technicians and administrativestaff;
c Foremen: supervision of routine labours inthe field or in the production process.
Nevertheless, only a very large operation couldjustify filling all of the positions described above.Remember: these positions represent fixed costs.In other words, costs that are paid regardless ofthe volume of production. Furthermore, althougheach additional person in management has nodirect impact on the volume of production, theydo increase the general expenses (telephone,office supplies, office space requirements, etc.)Extreme caution is therefore needed in defining alarge managerial structure.
Among the areas covered by the generalmanager’s mandate and which he/she maydelegate to his assistant managers, the followingare worth noting:
c Decisions on the daily production volume orthe combination of products to produce;
c Decisions on planting or harvest dates, orthe beginning of seasonal operations;
c The selection of supply sources for rawmaterials and inputs and the price to bepaid (in some cases, according to guidelineslaid down by the management committee);
c The selection of markets, timing of supply,and the decision over sale prices;
c The determination of the number ofemployees needed and their selection,frequently within the limits set by thesupervisory committee
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c Approval of normal expenses, such as officesupplies, fuel purchases, electricity, water,maintenance, etc.
D. Technical Assistance and ManagerialSupport
The demands of management and administrationof a business or other rural activity are frequentlybeyond the capabilities and experience of theparticipants. In order to bolster this area, it may beworth considering three broad levels of externalsupport.
A project might require one or more of thefollowing types of assistance, at least during thefirst years of its operation.
1. Professional Full-time Managers
This option is recommended when dealing with afairly complicated operation or which involvestechnical activities that are very demanding on theparticipants and for which they have little priorexperience. A common example might be a foodprocessing operation, such as cheese or juices,where poor quality can not be tolerated. It is rarethat a project, except in the case of the largest,need more than one outside manager
In some cases, it may be that the community orthe investors have technical capability, but noadministrative abilities, or that the marketingprocess calls for a highly experienced expert. As aresult, it is not always the general manager postthat is the position to be filled, an externalaccountant, plant manager or sales managerbeing more valuable.
When using an external manager, it isrecommended that his or her contract be for a longenough period to allow the business or activity tobecome established on a firm base. This could befor a minimum of two or three years, with the rightof earlier termination, in case the investment fails tomeet determined levels of volume, sales or otherindicators. In addition, it must be made clear fromthe outset that the position is not permanent, andthat the manager must train one or more assistantsfrom the community or group, who can eventuallyreplace him.
In addition to the right to terminate the contract,it is also suggested that the rewards of the job(salary, benefits) be linked to the performance ofthe business. For example, a moderate basic salaryplus a portion of yearly profits, which will yield agood income if the project performs well.
The cost of an experienced, successful managercan be substantial. It is, therefore, not often
feasible to employ one on a small project, wherethe earnings are insufficient to cover their cost andleave some profits for the owners/participants.Nor should a full-time manager be used for socialor environmental investments (which generatelittle or no income) unless an NGO, internationaldonor or state agency is willing to guaranteefinancing the position.
2. Management Consulting and PeriodicalAdministration
In cases in which the size or complexity of theoperation does not justify contracting full-timeexperts, serious consideration may be given tousing a periodic consulting or advisory service. Asa minimum, a small or medium sized investmentcould benefit in the following areas:
c Financial systems: Help is often needed toestablish and train staff in the operation ofthe accounting system, including periodicfollow-up visits to review the financialaccounts. For medium size or largerprojects, it is recommended thatprofessionally qualified persons be used andthat the operating rules call for a certifiedaccountant to carry out one – or better yet– two inspections of the financial accountsper year.
c Strategic Planning: Assistance in this areacan provide significant support for theBoard or supervisory committee and themanagement in the preparation, executionand monitoring of a coherent plan for thegrowth and development of the operation,including decisions about the goals,changes in the activities themselves andnew investments. This type of supportnormally need be no more frequent thanonce a year, and is frequently undertaken atlonger intervals (every two to five years).
c Marketing: Consultants or advisors familiarwith the product can carry out anevaluation of the existing markets, identifypotential new markets, and draw attentionto the need to modify the product (or someaspect of its presentation) in order toimprove its market position. Again, unlessthe operation is facing a crisis, assessment inthis area is not recommended more thanonce every two or three years.
c Technical processes: Support may beneeded for overall product quality control,solving specific problems, and reviewingtechnical procedures. Generally, this type ofsupport is particularly useful during the first12 to 24 months of the operation, but itmay continue, on a reduced scale (half-yearly visits) indefinitely, particularly if the
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specialist(s) bring knowledge ofdevelopments in other countries or markets which the project management is not familiar with.
c General Management: This is most oftenrequired when the inexperienced managerof a small investment does not know whereto look for help in solving the problems thathe encounters. It may, in fact, be difficult todistinguish whether a problem is badenough to justify calling upon externalassistance. Sometimes a government agencyor internationally funded project will coverthe cost of having a management expertvisit the project on a periodic basis to assesswhether the operation is proceeding well.
Whether or not the last of these services isavailable or utilised, it is very useful to havesomeone who is available by telephone in anemergency, to advise the manager on how toevaluate a problem and suggest where he can findhelp, if necessary. The ideal solution is that theperson who helped in the evaluation of theinvestment, that is, the person that appliedRuralInvest, stay in contact with the investorsbeyond the formulation stage to give themsupport in all of the areas they need. This matteris discussed in the following sub-section.
3. Teaching Skills and Training
With the exception of the smallest investments, itis rare for a project not to have at least some needfor training. In the previous sub-sections, we
analysed some of the areas where it is oftennecessary to strengthen the skills of project staff,including those working in accounting systems,financial control, marketing and sales, andstrategic planning. Also there might be a need fortraining the technicians in production processes,packaging, quality control and management ofinputs or finished goods, among other areas.
It is not necessary to carry out all training prior toproject start-up. In some cases it is preferable tofocus training initially only on the areas mostcritical in getting a process started. Such areas asstrategic planning or inventory control can be leftfor a later date.
It is worthwhile remembering, when programmingtraining activities, that some of the persons beingtrained will not be available later on, whetherbecause of leaving their jobs, illness, or simplyvacations. It is therefore strongly recommendedthat, where finances and scheduling permit, atleast two – and preferably three - persons be sentto each training activity that takes place outside ofthe actual project, to insure the availability of asecond person.
As with the case of technical assistance, it isfrequently possible to find grant funds to pay, orat least subsidize, the cost of training for thepersonnel of small scale investments. If theinvestment proposal is not linked to a supportagency with this type of funds, it is worthcontacting the Ministries of Agriculture, RuralDevelopment or Economy, in addition to theNGOs active in matters of rural businessdevelopment, to see if there are grants or othersources of funds available.
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Chapter IX
FINANCIAL ANALYSIS AND THE PREPARATION OF RECOMMENDATIONS
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1. Annual Cash Flow
The annual cash flow largely avoids the problemof comparing costs in one year with benefits inanother year by evaluating costs and incomeseach year, using only cash costs and incomes. Thecost of the investment enters into this analysisthrough the payment of the loan taken out tofinance it.
The annual cash flow is calculated by adding allcash income from each year and subtracting allcash costs for the same year; the result is the netyearly income. Then subtract the cost of financing(capital and interest) from this result. If theremaining amount is still positive, then the projectwill generate sufficient income during that year tocover all production costs, as well as the costs ofcredit, and still leave some amount of profit (theremaining amount).
The annual cash flow is the measure of greatestinterest to the potential lender (bank, project,cooperative etc.), as it shows whether the projectwill be able to generate enough cash to pay allcosts and still meet the financing costs. It is alsotypically the measure most easily understood bythe applicants themselves, although they shouldunderstand that by taking only cash, thisapproach can miss out important costs andbenefits that are not in cash terms.
2. Financial Profitability
The cash flow measurement represents only asnap-shot of the cash position each year; it doesnot offer an overall evaluation of the project. It istherefore not very useful for comparing differentprojects, or for assessing a project against someform of benchmark. If a government, adevelopment project or even the applicant himselfor herself wishes to choose the most productiveuse for available funds, they will need a differentmeasurement This requires an evaluation of thefinancial profitability of the project.
A financial analysis takes the results of all of theyears under study and presents them in terms of asingle figure. However, to achieve this objective,the methodology must take the decreasing valueof money and the general benefits that occur withthe passage of time into account. How should thisanalysis be carried out?
We will use the following as an example: If aperson were offered the opportunity to invest in aproject in which the expense is US$1,000 today,but which generates an income of US$2,000tomorrow, there are few who would hesitate(assuming faith in the honesty of the projectmanagers). However, if the offer instead is an
IX FINANCIAL ANALYSISAND THE PREPARATIONOF RECOMMENDATIONS
F inancial analysis applies mainly to projectsdesigned to generate income. It is possible to
analyse social projects, environmental undertakingsor production support activity, by calculating andassigning artificial prices, but such ‘economicanalysis’ is generally far too complex for small ormedium scale projects 13.
For income generating projects, the profitability ofthe activity is the first and most important factordetermining sustainability, because no ‘comercial’project will survive which does not generateenough income to cover operating expenses andpay financial costs. However, there is more thanone way to determine the profitability of aninvestment. Each approach has its strengths andweaknesses. It is therefore convenient to use morethan one method.
It is also important to understand that the figuresgenerated through financial analysis are not veryuseful on their own; they need to be interpreted.It is the responsibility of the technician who carriesout the formulation and evaluation process for theproject to explain to the applicants, as well as tothe committee reviewing the application forfinancing, the significance of the results, as well asto combine the profitability calculations withother indicators of likely success and sustainability,such as the capability and commitment of theapplicants, the reliability of the market, thecomplexity of the technology, the environmentalimpact and the degree of organization of themanagement.
A. Measurements of the Investment’sFeasibility
Once all of the costs and incomes have beendetermined for the analysis period (whether 8, 12or 20 years), the following questions should beasked: What measurements will be used todetermine the feasibility of the investment, infinancial terms? How can we interpret theseresults?
There are two distinct measurements used in theRuralInvest models for this purpose, each havingits advantages and disadvantages. Together theyprovide a comprehensive vision of the proposedproject’s feasibility.
13 The prices calculated under economic analysis not only provide values for those inputs and products that have nomarket prices, but also frequently adjust market prices which do not adequately reflect the true value of the good orservice (due, for example, to taxes, protective measures, or minimum wage levels).
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investment of US$1,000 to earn US$1,001 in 5 years, there would be no takers. The question,therefore, is to decide: What rate of return willmake it worth while to invest in a project? In otherwords, what rate of return represents a favourableinvestment and good use of the availableresources?
There are two main measurements that attemptto respond to this question: Net Present Value(NPV) and Internal Rate of Return (IRR). Both haveseveral key elements in common:
c They charge the total cost of the investmentin the year in which it takes place, so thatthe financing method and cost do not affectthe result of the analysis. Remember, thepurpose of the analysis is to identify agood project, not to select the bestfinancing option.
c They both include the value of the mainproject assets at the end of the analysisperiod (such as buildings, machinery andother substantial items). These are not incash, of course, and so are excluded fromthe annual cash flow analysis, but they areof value and should not be forgotten.
c They both place a value on self supply (e.g.unpaid family labour) and auto-
consumption (outputs used or consumedbut not paid for in cash).
c They adjust the value of future benefits insuch a way that a US$1 today is worth morethan a US$1 in one year, which in turn, willbe worth more than a US$1 in two years,etc. This process is called discounting thefuture benefits in comparison to benefitstoday.
a) Net Present Value
The simplest measurement is Net Present Value(NPV). After calculating the net annual income foreach year (as in the annual cash flow, but with thedifferences noted above), a discount rate isapplied to reduce the value of both net benefitsand losses in future years. Remember that adiscount rate is the opposite of an interest rate. IfI have $1, an interest rate of 10% will give me$1.10 in one year. By the same token, a discountrate of 10% will mean that $1.10 received a yearfrom now is worth only $1 today (its presentvalue). So, the NPV is a figure that represents thevalue of the project after discounting the netfuture benefits.
If for example I require an 8% interest rate on mymoney, then applying an 8% discount rate to the
46.30+50
96
89.16+50139.16
128.85+50178.85
165.61+50215.61
199.64+50249.64
249.64
250.00
-0.36
50Net income generated by project in Year 6:
Year 6 net income discounted to Year 5:
Net income generated by project in Year 5:
Total net income in 5th year
Year 5 net income discounted to Year 4:
Net income generated by project in Year 4:
Total net income in 4th year
Year 4 net income discounted to Year 3:
Net income generated by project in Year 3:
Total net income in 3th year
Year 3 net income discounted to Year 2:
Net income generated by project in Year 2:
Total net income in 2nd year
Year 2 net income discounted to Year 1:
Net income generated by project in Year 1:
Total net income in 1st year
Total Earnings
Initial Investment
Net Present Value:
NPV CALCULATION(Discount rate = 8%)
YEAR
10
-0.34
2 3 4 5 6
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future net benefits of a project will ensure that Iget that return. If the amount left (the NPV) is 0,the project is generating exactly the 8% required.If the NPV is positive, I have obtained my requiredrate (the 8%) and have that sum as a bonus.When the NPV is negative, it means that theinvestment cannot yield the expected 8%; itwould have to earn (after discounting) anadditional amount equivalent to the NPV amountto reach break-even.
For example, let us imagine that a project in whichan investment of $250 results in six years ofbenefits of $50 each year, or a total of $300 (seeprevious page). It would appear that there is aprofit of $50. But this is true only if you do nottake the time-value of money into account. Ifinstead you apply an 8% discount rate you can seethat, in reality, the project is not very attractive.The NPV of the $250 investment is -$0.34. That isto say, if you require an investment to yield an 8%interest rate, it fails to meet this goal by anamount of $0.34.
Clearly, the critical aspect of the calculation ofNPV is the selection of the discount rate (orinterest rate). A high rate will result in the rejectionof more projects and will favour those projectsthat generate their earnings in the first years. Alow discount rate will normally result inacceptance of more projects and will give moreweight to the benefits generated in the moredistant future.
But, how do you choose the discount rate? Themost correct definition, as stated by the WorldBank, is that it is the rate equal to the increase inthe Gross Domestic Product (GDP) resulting fromthe investment of one additional dollar in a givencountry. So if a dollar causes an increase ofUS$1.07 in the GDP of the country in which youlive, the discount rate should be 7% - becausethen your investment will be equal to or betterthan the average for the economy as a whole.Such a definition, however, is easier said thanmeasured, because there is no easy way of makingthe necessary calculation.
For practical purposes, it is better to say that thediscount rate is the rate of annual net earnings(excluding inflation) that is required for aninvestment to be worth the effort. However, thisrate will not remain the same for all investors or allinvestments. It will depend greatly on thealternatives that are available and, even more, onthe risks that the project faces. An investor in a bigsolid bank would probably require a lowerdiscount rate on future earnings than someoneputting money into a petroleum explorationcompany, where rewards can be high butbankruptcy is always a possibility.
It has become customary in many cases to use8%, but any figure between 6% and 12% would
be acceptable. However, remember thatinvestments with high levels of risk need a higherrate of return, and that if few other uses can beidentified for the available funds, it might beacceptable to lower the rate.
b) Internal Rate of Return
The Internal Rate of Return (IRR) 14 uses amethodology very similar to that of the NPV. Thekey difference is that, in using the IRR, one isasking what discount rate (or interest rate) will thisinvestment support? If the IRR is 15%, that meansthat the initial investment will yield an interest rateof 15% over the life of the project.
Calculating the IRR is tricky, as one must first guessat the IRR, then run the NPV calculation and see ifthe resulting NPV is positive or negative. Theestimated IRR is then adjusted (up if the NPV ispositive, down if it is negative) and the calculationrepeated again. This goes on until the NPVreaches exactly zero. This then is the IRR.
Making these calculations used to be a mosttedious procedure, but nowadays the computerhas made it easy, doing in a second what theanalyst might have taken many minutes to do afew years ago.
B. The Impact of Taxes
The RuralInvest methodology places littleemphasis on the calculation of taxes, especially onthose related to income. Although these taxesmay prove important in well established andsuccessful projects (for example, in the case of anagro-industrial plant), they are irrelevant for thedetermination of the feasibility of smallinvestments. The problem that these projects faceis more one of survival than estimating taxes onearnings.
When dealing with other types of taxes (forexample, property taxes) the RuralInvestmethodology considers them simply as otherindirect or general costs and they should beincluded in the tables for these costs.
C. Preparation of Recommendations
A blind faith in the results of a financial analysis, asa guide to the approval of an investment proposal,is dangerous for the following reasons:
a) A computer can only process the data that isfed into it. Therefore the quality of thecalculation generated by the formatsdepends, to a large extent, on the quality of
14 Also called the Internal Financial Rate of Return, IFRR, to distinguish it from the Internal Economic Rate of Return, IERR
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the information provided by the applicantsand their support technicians. In the realworld, very little information is 100%reliable. Estimations of prices, costs, volumesand duration can be wrong, in spite of thebest efforts of the persons involved. So it isimportant to remember that a financialanalysis represents the results uunnddeerr tthheeaassssuummppttiioonnss mmaaddee bbyy tthhoossee wwhhoo ssuupppplliieedd tthheeiinnffoorrmmaattiioonn.
b) A project that is profitable may be successful,but is in no way guaranteed to be a success.Even if the figures used for the calculation are reliable, a project can still fail. Amongother factors, problems arising from poorlycommitted participants, an ineffectivemanagement, or unexpected price changescan destroy a profitable project. Therefore, itis vital that you consider all of the factors thatmay influence the success of the investment,and not only the financial profitability.
How can these risks be recognized and taken intoaccount in presenting the results of theevaluation? First, it is crucial to take advantage ofthe considerable speed and power of thecomputer. Once the data have been entered it isvery easy to test alternative possibilities withouthaving to repeat all the earlier work. One canimmediately see the impact of a change,sometimes by altering a single number. This iscalled "sensitivity analysis" and its purpose is toindicate how the results of the study will changewith small changes in the assumption made.
For example, if a product has an average price of$10, what will happen if the price drops to only $8If the profit disappears completely (or evenbecomes a loss), you know that the profitability ofthe investment depends very closely on the priceof the good or service it produces and sells. Thesame procedure can also be used for a non-profitproject. How would the running costs of acommunity health clinic be affected if the numberof patients attending were lower than expected? Ifthe community relies on a standard subsidy perpatient from the Ministry of Health, then lowerthan expected patient numbers might mean theclinic can not meet its overhead costs (nurse,lighting, repairs etc.) and has to close down.
To make a sensitivity analysis, the technician must:
a) Identify those elements of the project forwhich: (i) doubt exists as to the correctnumber to use (e.g. should the price be 6, 8or 10), and (ii) which are expected to be ofimportance to the project (there might bedoubt over the price of paperclips, but itwould probably not be worthwhile testingthe impact of this change on project
performance). Commonly, such elementsinclude: prices of outputs, number ofanticipated users, cost of inputs; productionvolumes, the efficiency of the productionprocess (i.e. how much input is needed toproduce 1 kg. of output), the time neededto start-up or yield (in the case, for example,of tree crops) and once production isunderway, the time needed to reach the fullproduction level.
b) Determine a likely range of possibilities for each factor. For example, for a priceanalysis, one might say that, although theaverage price is $10, the possible range isfrom $7 to $12.
c) Insert new figures into the RuralInvestcomputer tables and note the results. The best way of presenting the results is to organize the figures into a chart,demonstrating the profitability of theinvestment for each factor (price, cost, etc.)with average, pessimistic and optimisticassumptions, but this is not essential.
d) In the transmittal letter that must accompanythe detailed analysis, the analyst shouldidentify those factors for which the project ismost sensitive and indicate how variations inthese factors might change the profitabilityof the investment, for example:
"Although the proposal to install an irrigationsystem looks quite profitable, it must be notedthat it is very sensitive to variations in theyields of the vegetables grown. If, instead of12 metric tons per hectare (mt/ha), only 10mt/ha are obtained, the project becomesmarginal. If the yield drops further to 9 mt/haor less, the investment ceases to be profitable."
e) When a proposal shows high sensitivity tochanges in key factors, the technician’sreport should consider the probability ofthese variations occurring, for example:
"However, the applicants have extensiveexperience in growing vegetables andalready obtain yields in excess of 12 mt/ha inthe few areas where there is now access towater during the summer. The risk of lowerthan expected yields is not thereforeconsidered to be very high".
The steps described above insure that the peopleconsidering the financing proposals have theinformation that they need to make an informeddecision.
With respect to the relative importance of financialand other factors in project success, it is theresponsibility of the technician in charge of
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formulation and evaluation to carefully considerand identify any other aspect of the proposal thatcould influence in its feasibility, and not rely solelyon the financial analysis. The transmittal letter forthe proposal should make reference to the abilityof the applicants to manage and administer theinvestment, to the sustainability of the project, interms of environmental impact and the utilizationof resources and the risks that the investmentmight encounter.
Remember, you are doing no one a favour byrecommending an investment that does not havea good possibility of success. Where the project isfinanced with credit, a failure can leave a group orcommunity in debt, with no possibility of payingit off (probably restricting its access to financing inthe future). Even in the case of a project that onlyuses donated funds, you must remember thatevery failure means that there was another goodproject that was unable to obtain the resources itneeded for success.
The procedures explained in this chapter largely assume that the proposed investment is completelynew, and thus all costs and income will be directly attributable to the project. This is certainly thesimplest case. But what if the investment is applied to an earlier, existing activity where there arealready costs and revenues? How can the impact of the new investment be properly reflected in thefinancial analysis? The answer is that, where the proposed investment will give rise to changes in anexisting activity, it is necessary to look at costs and revenues both with and without the new project.
Take, for example, the case of a group currently growing melons on a 3 hectare field. They wish toinstall a pump which will bring water from a nearby stream during the dry season to providesupplemental irrigation. Clearly the cost of purchasing and operating the pump are new costs, butwhat about the actual production? As more water is available, it may be worthwhile adding morefertilizer and other nutrients, to allow the melon plants to make full use of the new supply. Currently,the group is applying 2.5 bags of fertilizer per hectare, but the group decides to increase this to 3.5bags if water is available. The incremental fertilizer usage would thus be 1 bag/ha, and theincremental cost would be the price of 3 additional bags (for 3 hectares). Equally, yields are currently5 tons/ha, but the group is confident that this can be increased to 8 tons/ha with irrigation.Incremental revenue is thus 3 tons per hectare, or 9 tons in total, times the price per ton received forthe melons. Other incremental costs incurred by the new project may arise from changes in theamount of seed sown, the increased number of melons to be harvested, and the increased numberof bags or boxes needed for packaging.
Remember, if you apply all costs and income anticipated after the new investment, you may wellcome up with the wrong answer as to the profitability of the additional investment. In the case above,it is important to compare only the incremental costs (the pump and additional fertilizer etc.) withthe incremental output of 9 tons of melons. If fuel for the pump is expensive, or if the projectedincrease in yield is small, it is not impossible that the group would be better of without irrigation, butthey can not know unless they use incremental costs and revenues.
Investing in an Existing Activity – the Importance of Incremental Costs and Revenues
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Chapter X
PREPARATION FOR THE INVESTMENT AND BEYOND
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PREPARATION FORTHE INVESTMENT ANDBEYOND
It would be very unfortunate if the support givento a community, group or individual applicant
were to end with the presentation of theinvestment proposal to the financing agency.Although this may have seemed to be the finalgoal while formulation was underway, in reality itis just the beginning.
Between the formulation of an investmentproposal and the actual launching of the project,lie many tasks that are extremely difficult forpersons who have no experience in negotiatingwith bankers, lawyers and government officials,(either municipal or from the centralgovernment, as is the case when applying forhealth permits). Even when these obstacles haveall been surpassed, there is still the enormouschallenge of making the investment functionsmoothly. If the group encounters a problemafter a few months of operation, where does itgo for help?
A. The Importance of Support andFollow-Up
In order to achieve a successfully functioningproject, it is vital that the small investors have areliable and accessible source of support andfollow-up during the preparation and start-upperiod. The best person to provide this support is,without doubt, the same person that helped thegroup identify and formulate the proposal. If forsome reason it is impossible for the fieldtechnician to continue with the group, he or shemay be replaced by someone else, but somesupport should always be made available duringthis critical period. If it is not provided, the entireeffort is at risk, because there is a good possibilitythat the project will never get underway as it wasconceived.
Among the most important tasks to be taken careof during this period, are the following.
(a) Helping the applicants to reaffirm theircommitment to the project and theirparticipation (especially in the case ofcommunity-based projects);
(b) Accompanying the applicants in financialnegotiations, the acquisition of legal permits,etc.;
(c) Support in preparing the start-up plan;
(d) Procurement or contracting of goods andservices needed in the investment and theirinstallation and supervision;
(e) Follow-up in the execution process.
Below, each of these tasks is described in detail.
B. Reaffirmation of the Commitmentof the Applicants
To ensure the applicants’ full commitment to thefinal project, it is first of all necessary to have theiractive participation throughout the process,starting with identification. As the final designemerges from the formulation process, it isimportant to verify that the group is both capableand willing to provide its contribution asstipulated in the final design, as and whenneeded, be it in cash, labour or in the supply ofmaterials. To evaluate this capacity and availability,the technician, working with the applicants,should conduct at least one meeting beforepresenting the final proposal to the financialagency, to explain it to the applicants and toinsure that the final product reflects theirintentions and interests.
He or she should conduct an additional meeting,once the formulation and evaluation process isconcluded, organized by the members of theapplicant group, at his request. One conditionthat the group must fulfil is attendance and thepersonal involvement of all adult members (men,and women of the participating families) in themeetings. As a result, they should develop anoutline of the plan of execution, which specifies:
c Necessary activities, deadlines and personsresponsible for their performance.
c Financial and material contributions bymembers of the group.
C. Accompanying the Applicants inFinancial Negotiations and SeekingLegal Permits.
The field technician, with the approval of theapplicant group, should make contact with thefinancial institutions that collaborate in theprocess of investment. This could involve periodicconsultations with the financing agency on theprogress of the proposals in formulation, or mayrequire only a single presentation uponcompletion of the detailed proposal. However,once the formulation and evaluation phase iscompleted, the technician is responsible foradvising the applicants as to any specific
X
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administrative requisites of the financial agency.This might include, for example, attaching avariety of legal documents relating to theapplicants to the investment proposal.
The financing agency may also require theapplicants, or at least their selectedrepresentatives, to attend a formal meeting for thereview of their application, and they should besupported at this meeting by the technician. He orshe may also help by gathering information onlegal aspects, or assisting them in filling outmandatory forms.
It is possible that the group may need guidanceon selecting between alternative financial options.
D. Support in Preparing a Start-up Plan
Whether during the detailed formulation andevaluation phase, or during the resourceprocurement stage, the field technician, shouldassist a working group, chosen by the applicantgroup itself, to prepare a plan for theimplementation of the project, based on theinvestment proposal. This plan must contain:
c Overall guidelines as to the timing andobjectives of the implementation process;
c A listing of the specific activities needed andtheir schedule of implementation;
c The identification of the persons responsiblewithin the applicant group for theseactivities;
c Any organizations or institutions which havepromised to provide technical support indifferent activities;
c The exact financial and materialcontributions to be made by members ofthe group for the different activities, and thetiming of these contributions;
c Indicators for monitoring of theimplementation process, including book-keeping and measuring physical quantities(where relevant).
It is essential that the groups be provided withadequate training on the administration of funds.Among other tasks, the field technician mightadvise them on aspects of accounting and generaladministration. Alternatively, he or she might actas an intermediary in obtaining such assistancefrom another advisor.
Once the project is underway, the technician willnormally only make periodic visits to follow up onthe progress of the investment. In particular, it isimportant to try and identify problems before
they cause serious difficulties and help the projectmembers to obtain appropriate advice on how todeal with these problems. In this regard, it isrecommended that the agency sponsoring theinvestment process, keep a register of specialistadvisors from governmental and non-governmental institutions to which projects withproblems can turn.
Such a register of approved advisors can serve asa powerful tool, by laying down specificrequirements for those who wish to offer theirservices. Those wishing to be listed in the registercan be required, for example, to participate inRuralInvest training, and those who performpoorly can be removed from the register (thislatter procedure makes it necessary for the work ofeach advisor to be evaluated by projectmembers). However, the significance of theregister can be even more important; having a listof approved experts will allow the sponsoringagency to leave in the hands of the applicantgroup the selection of the person they want, andthereby, strengthen their participation in theprocess.
E. Purchase and Contracting of Goodsand Services
The financial agency will probably haverequirements and standards for the procurementof goods and services, for example, demandingthree quotes and a transparent selection process.Even if such established procedures are missing, itis important that the applicants follow a clearprocess of identifying, evaluating and selectingvendors and service providers. Furthermore, theremust be norms for the monitoring and control ofthe activities carried out by the contractors,including procedures for materials control,register of advances and certification of the timededicated to the job by the contractor and histeam.
F. Follow-Up to the ImplementationProcess
Each agency or financing project should have itsown methodology for the process of follow-up onthe implementation of the investment. Theimportant aspect is that it have a methodology.Investments that are begun without some form offollow-up will be more likely to fail, in comparisonwith those that receive support and advice.
In many cases, project participants will needtraining in accounting and in the local laws, inmatters concerned with taxes, health permits, andsocial benefits for employees, among other things.
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Frequently, project managers will need training inplanning, marketing and similar subjects. If theproject involves the management of productionprocesses, it is possible that there will be technicalproblems during the first year of operations.
There are two general models for handling thistype of support. The first is to continue with thefield technician or community promoter, playingthe role of "family doctor"; this means that thetechnician visits the community or investmentevery month or six weeks and keeps an eye on theprogress of the work. If a problem comes up, it isthe responsibility of the technician to request theapproval of the financial agency or the sponsor, to
use specialized consulting and to select, or to helpthe investors to choose, the right person for thework required.
The second model, is to contract a localconsulting firm, NGO or other group to take onthe total responsibility for supporting the projectmembers during a period of one or two years.With a set amount of resources available, theadvisors arrange for all of the support the groupneeds. On a more sophisticated level, it should bepossible to relate the remuneration received bythe advisors to the success of the investment,although, in practice, this arrangement is not thateasy.
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ANNEXES
ANNEXES
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Appendix 1a: EnvironmentalCategorisation of Projects
The following is an indicative list of investmenttypes that could be included within the fourenvironmental impact categories described inChapter 5.
It must be noted that the list is only a guide forassessing each project, without loosing sight of itscharacteristics and merits. It is recommended that,before starting RuralInvest use, environmentalexpert advice is sought on how to apply thesecategories in the project area. It is also stronglyrecommended that a program of training andtechnical assistance in environmental assessmentbe designed and implemented, to improve theunderstanding of field technicians on the meaningof these categories. This would enable thetechnicians themselves to propose modificationsin the classification to ensure the inclusion of localproductive systems and hence the incorporationof appropriate environmental mitigation measuresinto project design.
For Category A:
Projects in which no or negligible adverse effects on the environment are foreseen andwhich, consequently, require no environmentalmitigation measures.
- Soil conservation activities, for the purposeof improving farmland productivity, henceavoiding the conversion of forests intocropland/pasture;
- Controlled experimentation (agricultural/pastoral/forestry) for research purposes anddemonstration in small parcels, except inhighly sensitive areas 1;
- Small-scale organic agriculture 2;
- Cultivation of permanent crops under theforest canopy that does not involvepesticide use;
- Sustainable harvesting 3 of non-wood forestproducts 4;
- Construction of rural warehouses, if limitedto small collection centres for the storage ofgrains or other agricultural products,community stores and structures for harvestdrying;
- Initiatives for integrated micro-watershedmanagement;
- Small-scale initiatives on the conservationand sustainable use of biodiversity.
For Category B:
Projects with possible low adverse environmentalimpacts, which can readily be mitigated. In thiscase, a detailed identification of the possibleenvironmental impacts has to be made andmitigation measures incorporated in projectdesign (see section D of chapter 5).
- Small or medium-scale agricultural and/orpastoral activities in areas with no or littleconstraints of slope (e.g. cultivated soils onslopes not greater than 6%) 5, rockiness,drainage, effective depth, water availabilityand/or soil fertility;
- Agroforestry associated with annual crops 6
in areas with little constraints of slope (e.g. cultivated soils on slopes not greaterthan 6%), rockiness, drainage, effectivedepth, water availability and/or soil fertility;
- Agroforestry associated with perennial cropsin areas with moderate constraints of slope(degree of slope less than 10%), rockiness,drainage, effective depth, water availabilityand/or soil fertility;
- Construction or rehabilitation of small-scaleirrigation infrastructure for areas up to e.g.50 hectares;
- Pasture management on natural pastures;
1 Highly sensitive area refers to ecologically sensitive sites such as areas with steep slopes (more than 10 degrees), riparianvegetation, vegetation around springs, critical habitats for local species, etc.
2 However, in the case of organic coffee, category A is only applicable when the producers do not use wet coffeeprocessing methods, which can cause river and stream pollution.
3 Sustainable harvesting refers to the extraction of plants and other resources from forests which does not affect theavailability of these resources in the long term and does not damage the ecological integrity of the forest.
4 Non-wood forest products (NWFP) include products used as or with food (e.g. fruits, mushrooms, nuts, herbs, spices,cacao, honey, and animals hunted for meat), fibres (such as rattans), rubber, resins, gums, and plant or animal productsused for medicinal, cosmetic or cultural purposes. They can be gathered from the wild, or produced in forestplantations, agroforestry schemes and trees outside forests. NWFP are vital to the daily subsistence of forest-dependentcommunities, and contribute to the subsistence and local commercial economy in other rural communities. SomeNWFP are also commercialised in a larger scale (e.g. cork).
5 Source: Jain, Urban, Stacey, Balbach: Environmental Assessment. MacGraw-Hill, 1993, p.90/373.
6 Systems of permanent plantings associated with trees (isolated into blocks or plantations, whether these be fruit speciesor others for the purpose of lumber and other forestry products).
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- Community forestry;
- Rehabilitation planting (with native species)in areas that have been deforested;
- Eco-tourism;
- Construction or rehabilitation of minor ruralroads and bridges (within farms) which donot cross ecologically sensitive areas 7;
- Establishment or improvement of small-scaleagro-industries (e.g. processing of milkproducts with an average daily consumptionof less than 100 lt. of milk, meat processingwith an average daily output of less than 50 kg of meat, wet coffee processing withless than 1,500 cwt. of coffee berries perweek);
- Small-scale artisan workshops, includingsmall clothing and textile workshops (e.g. silk screen printing done by hand);
- Establishment or improvement of small-scaleaquaculture activities (e.g. total area ofponds less than 0.5 hectare);
- Construction or improvement of small-scalewater supply and sanitation infrastructure(less than 100 persons) 8;
- Construction or rehabilitation of smallschools or health centres (if not located inecologically sensitive areas).
For Category C:
Projects with possible moderate or significantadverse environmental impacts, but wheremitigation is possible. These projects require anenvironmental assessment, undertaken by anenvironmental specialist, and detailed mitigationmeasure proposals have to be incorporated in theproject design. Commissioning of specialisedenvironmental studies on critical aspects, or a fullEnvironmental Impact Assessment (EIA) may benecessary.
- Controlled and regulated exploitation oftimber and other wood products of a forest 9;
- Small/medium-scale agricultural and/orlivestock activities in areas with strong (but not severe) constraints of slope (degreeless than 10%), rockiness, drainage,effective depth, water availability and/or soilfertility;
- Agroforestry involving with annual crop-treesystems in areas with strong (but notsevere) constraints of slope (degree less than10%), rockiness, drainage, effective depth,water availability and/or soil fertility;
- Construction or rehabilitation of medium-scale irrigation infrastructure for areas ofmore than 50 hectares;
- Purchase and use of pesticides, other thanthose listed in Table 1, or project activitiesthat are likely to increase pesticide use (e.g.construction of irrigation schemes,establishment of orchards, etc.) (see alsocategory D);
- Construction or rehabilitation of small ruralroads and bridges which do not crossecologically sensitive areas 10;
- Establishment or improvement of medium-scale agro-industries (e.g. processing of milkproducts with an average daily consumptionof more than 100 lt. of milk, meatprocessing with an average daily output ofmore than 50 kg of meat, wet coffeeprocessing activities with more than 1.500cwt. of coffee berries per week, palm oilmills, wool scouring);
- Medium-scale textile industry (e.g. silkscreen printing done by machine in lessthan 100 m2 / day);
- Small-scale artisan workshops involving fibredying and tanning;
- Saw-mills and processing plants for forestryproducts;
- Establishment or improvement of medium-scale aquaculture activities (total area ofponds more than 0.5 hectare);
- Construction or improvement of watersupply and sanitation systems (e.g. for morethan 100 persons);
- Establishment or improvement of solidwaste collection and disposal structures;
- Initiatives in the buffer zones/multiple usagezones of protected areas;
- Initiatives that might affect endangeredspecies (e.g. introduction of exotic species)or negatively affect their habitat (tropicalforests, mangrove swamps and otherwetlands, etc.).
7 Highly sensitive area refers to ecologically sensitive sites such as areas with steep slopes (degree more than 10%),riparian vegetation, vegetation around springs, critical habitats for local species, etc.
8 Source: World Bank Environmental Guidelines for Social Funds; D. Graham et. al, 1998).
9 These activities may be counterproductive unless they have an adequate Management Plan, approved by anenvironmentally competent institution.
10 Highly sensitive area refers to ecologically sensitive sites such as areas with steep slopes (degree more than 10%),riparian vegetation, vegetation around springs, critical habitats for local species, etc.
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For Category D:
Projects with potentially significant adverseenvironmental effects, for which there are noeffective mitigation measures, or projects whichare incompatible with the sustainabledevelopment policies of the country or ofinternational development agencies. In this case,the project has to be completely reformulated orexcluded from financing.
- Agricultural activities that involvedeforestation and/or conversion of forestedareas into farm and/or pasture land(whether they be deforestation of primaryforests 11, deforestation of natural or artificialforests established for protection purposes(including the protection of riverbanks andslopes), or cutting of trees around ponds,springs or artesian wells, puddles andnatural or artificial lagoons, archaeologicalsites, etc.);
- Forestry activities that involve deforestationor exploitation of wood products fromnatural forests, except when these areconsistent with the Forest Management Planapproved by the competent forestry orenvironmental institution;
- Colonisation in primary forests;
- Exploitation of trees from mangroveswamps;
- Construction, improvement andmaintenance of roads that pass throughunexploited natural forests;
- Any activity in strictly protected areas suchas nature reserves, national parks, and corezones or rehabilitation zones of protectedareas;
- Initiatives that might significantly affectendangered species or negatively affect theirhabitat;
- Changes to less sustainable agriculturalsystems such as the transformation ofshade- covered coffee plantations intounshaded plantations;
- Agricultural activities involving the plantingof annual crops in areas with severeconstraints (steep slopes (more than 10degrees) etc.);
- Purchase and use of pesticides classified bythe World Health Organization as ExtremelyDangerous (Class Ia) and Highly Dangerous(Class Ib), see Table 1;
- Purchase and use of pesticides classified bythe World Health Organization asModerately Dangerous (Class II) if (i) thecountry lacks restrictions on theirdistribution and use, or (ii) they are likely tobe used by, or accessible to, lay personnel,farmers, or others without training,equipment, and facilities to handle, store,and apply these products properly;
- Purchase and use of pesticides over largeareas.
11 Natural forests in pristine conditions, undisturbed by humans.
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Table 1. Pesticides classified by the WorldHealth Organization as Extremely Dangerous(Class Ia) and Highly Dangerous (Class Ib)
The users of this table should note that the actualhazard classification of a formulated pesticideproduct available on the market depends on anumber of factors, including the toxicity of theactive ingredient, its concentration, and thephysical state of the product (liquid or solid). Theactual classification of the formulated productshould be provided on the label. In many - but notall! - cases, it will be the same as the classificationof the active ingredient. The table below providesan initial indication of the hazard classification ofactive ingredients ("common name") andformulated products ("trade names andtrademarks").
The list of trade names and trademarks arecommonly available products. Particularly indeveloping countries, there may be other tradenames that are not on this list. The list shouldtherefore not be considered as exhaustive butrather as a list of examples.
It should also be noted that, in addition to theextremely and highly dangerous pesticides listedin this table, World Health Organization classifiesmoderately hazardous pesticide formulations inClass II. Even if less hazardous than Class Iproducts, use of Class II pesticides still requires ahigh degree of precautions and may cause lethalor otherwise severe poisoning if used improperly.Preconditions for the use of Class II pesticidesinclude: (i) adequate and enforced legalrestrictions on their distribution and use; (ii)safeguards to prevent the use of, and access to,these pesticides by lay personnel, farmers, orothers without appropriate training, equipmentand facilities to store and apply them properly;and (iii) user adherence to precautionary methodsproven effective under field conditions indeveloping countries.
The final column of the table includes some of themost common trade names and trademarks usedby basic producers and formulators of pesticides.It is based on information contained in theMeisterPro Version of the Farm ChemicalsHandbook (Electronic Pesticide Dictionary),edition 2001.
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name*
I-S
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I
FST
I
I
R
I
I
I-S
Trade name or trademark
Aldicarbe, Temik, Sanacarb
Brobait, Forwarat, Havoc, Micedie, Mr. Morton, Nofar, Sorexa, etc.
Acilone, Atila Pellets, Bromalone, Killrat, Lafar, Obamice, etc.
Vengeance
-
Santar, Foltaf
Fortress
Dotan, Sherman
Actosin, Lepit, Dicusat, Trokat Bait, Ramucide, Ratomet, Raviac, Topitox, etc.
Frunax-DS, Neosorexa, Sorexa
-
Diphacin, Promar, Ramik, Tomcat, etc.
Ekatin, Disyston, Bay 19639, Disultex, Disulfoton P10, etc.
-
Mocap, Fertiprophos, Vimoca, Rifenfos
Storm, Stratagem,Kukbo Coumafen
Dytonato
Bent-cure, Bent-no-more, No Bunt
-
Phosdrin, Duraphos, Mevidrin
Alkron, Ekatox, Folidol, Rhodiatox Paration Metilico, Chimac Par H, Pox Konz, Woprophos, Alleron, Aphamite, Corothion, Etilon, Orthophos, Panthion,Paramar, Phoskil, Soprathion, Stathion, Fighter, etc.
Cekumethion, Fulkil, Metacide, Bladan M, Folidol M, Metacide, Amithion,Agrodol, Paration Metilico, Agro-Parathion, Vitamethion, Penncap-M,Folidon, Devithion, Dhanudol, Dhanumar, Pox M20, Metpar-200, Fosforin'M,Bration, Methion, Kildot, Korthion, Parathol, Faast, Dipathio M, Vegfru Klofos,Probel MP-35, Proficol, Woprophos- M, Parasul, Gearphos, Metaphos,Partron M, Tekwaisa, etc.
-
AC 3911, Granutox, Thimet, Agrophor, Frotox, Dhan, Chimifor, Pestophor,Chim, Tuskar, Phoril, Kurunai, etc.
Dimecron, Phosron, C 570, Fosfamid, Alfamidon, Chemphos, Devimidon,Phos-All, Pradhan, Mitekron, Midon, Phos-Sul, etc
-
Bladafum, Dithio, Thiotepp
-
Plydax, Contrave, AC 92100, Turbolux, Contraven, Counter, Biosban, Pilarfox,Terborox, Tertin, Fortune-T1, etc.
Common name
aldicarb
brodifacoum
bromadiolone
bromethalin
calcium cyanide
captafol
chlorethoxyfos
chlormephos
chlorophacinone
difenacoum
difethialone
diphacinone
disulfoton
EPN
ethoprophos
flocoumafen
fonofos
hexachloro-benzene
mercuric chloride
mevinphos
parathion
parathion-methyl
phenylmercuryacetate
phorate
phosphamidon
sodium fluoroacetate
sulfotep
tebupirimfos
terbufos
CLASS 1a
* AC = acaridicide, FM = product for fumigation, F = fungicide, FST = fungicide for treatment of seeds, H = herbicide,I = insecticide, L = larvicide, MT = miticide, N = nematocide, O = other use for plant pathogens, R = rodenticide, S = applicable to the soil.
RuralInvest Mod.3 EN 07.qxd 21-11-2007 11:56 Page 76
77
Use*
H
H
I
I
F
I
I
N, I
I
I
I
R
AC,MT
R
I
I
I
I
H
I-S,H
F
I
I
I
R
AC
I-S
I
I-S
I
I
L
I
O
I
Trade name or trademark
Aqualine Magnacide
-
Bay 16259, Gusathion, Sepizin L, Crysthion
Azimil, Azinugec, Carfene, Metazintox, Sepizin M, Pancide, Gusathion,Guthion, Azinfosmetil, Agrothion, Chimithion P.B., Crysthyon, Cotnion'H,Azin, Azition, Mezyl, Probel G-20, etc.
Bas-S
-
Plant Pin, Co 859
Apache, Taredan, Rugby
Spra-cal, Turf-Cal
Carbodan, Carbosip, Yaltox, Rampart, Furacarb, Vitafuran, Curaterr, Diafuran,Chemfuron, Fertifuran, Furasun GR, Carbo-Tox, Carboter, Damira, Caribo,Curasol, Fury, Volfuran, Furadan, Woprofuran, Buraon, Furasul, Thodfuran,etc.
Birlane, Supona, Steladone
-
Asuntol, Co-Ral, Penzin
Racumin, Kukbo Stunt
-
Metasystox, DSM, Mifatox, Metaphor
Aminatrix, Canogard, Dedevap, Mafu, Acivap, Agrona, Cazador, Agro-DDVP,Dichlorate, Vitavos, Ouo, Cekusan, Nuvachem, Devikol, Domar, Didivane,Foravap, Didifos, Hercon Vaportape II, Hilvos, Kilvos, Koruma DDVP, Stevie,Novos, Midiltipi DDVP, D.D.V. Paz, Vantaf, Woprylphos, Rupini, Dadasul, DeDe Vap, Tazusa, etc.
Bidrin, Dicron, Ektafos
Herbogil
Hercynol, Trifinox, Polartox, etc.
Blastoff, Hinosan, Bay 78418, Edisan, Vihino
Croneton
-
Cybolt, Cythrin, Pay-Off, Fluent
Rhodex, Fluorakil, Navron, Yanock
Carzon, Dicarzol
Deltanet, Promet
Hoe 02982, Hostaquick, Ragadan
Miral, Triumph, Victor
Bay 12869, Oftanol, Lighter
Karphos, E-48
Gypsine, Soprabel, Afos
-
-
Tamaron, Monitor, Bay 71628, Tam, Sinator, Amiphos, General, Metamidofos,Agromon, Vitaphos, Nuratron, Sherman, Tamanox, Erkuron, Matón, Amidor,KASA, Metalux, Metaron, Metafós, Methamidopaz, Woprotam, Thodoron,Vetaron, etc.
Common name
acrolein
allyl alcohol
azinphos-ethyl
azinphos-methyl
blasticidin-S
butocarboxim
butoxycarboxim
cadusafos
calcium arsenate
carbofuran
chlorfenvinphos
3-chloro-1,2-propadeniol
coumaphos
coumatetralyl
zeta-cypermethrin
demeton-S-methyl
dichlorvos
dicrotophos
dinoterb
DNOC
edifenphos
ethiofencarb
famphur
flucythrinate
fluoroacetamide
formetanate
furathiocarb
heptenophos
isazofos
isofenphos
isoxathion
lead arsenate
mecarbam
mercuric oxide
methamidophos
CLASS 1b
RuralInvest Mod.3 EN 07.qxd 21-11-2007 11:56 Page 77
78
Use*
I
I
I
I
I
I
I
L
I,F,H
R
I
I
I
R
R
R
I-S
R
I-S
I
I
I
R
R
Trade name or trademark
Supracide, Supra, Supradate, Datimethion, Medacide, Bumerang, Ultracidin, etc.
Draza, Mesurol
Flytec, Dupont 1179, Kipsin, Lannate, Aldebaran, Acinate, Metholate, Avance,Dumil, Dunet, Memilene L, Lanox, Fertiomyl, Matador, Dynamil, Lanomac,Lanomed, Methopaz, Metopron, Methylan, Agrinate, ect.
Azodrin, Nuvacron, Susvin, Aminophos, Monoglen, Monocrotofos,Monacron,
Aimocron, Monochem, Devimono, Monodhan, Crisodrin, Foradrin, Hukron,Atom, Agrodrin, Inisan, Kilphex, Hazodrex, Luxafos, Monofos, Azakron,Milphos, Agrophos, Cropaphos, Monolex Lucadrin, Croton, Woprotect, R CPos, Monosul, Thodocron, Vacron, etc.
Nico Soap
Folimat, Modern, Le-mat
Blade, Vydate
Aimcosystox, Anthonox, Metasystox R, Oxydemetchem, Dhanusystox, MSR2,Mesh
-
Pentacon, Sinituho, Penchloral
-
Solgard, Primicid
Kayaphos
Catalyst, Blotic, Safrotin, Seraphos
Arsenipron L, Prodalummol Double
Cyanogas A
-
Attack, Forca, Forza, Force, Komet
-
Decamox, Dacamox
Ekatin, Bay 23129, Thiotox
Hoe, Hostahion, Able, Fulstop, Triumph, Trelka, Trihero, Try, Sutathion,Perfect, Tries
Kilval, Trucidor
Dicusat E, Luxarin, Ramorin 2, Woprodenticide, Warfotox, Cov-R-Tox,Rodex, Tox-Hid
Deviphos, Fastkill, Zinphos, Fokeba, Phosvin, etc.
Common name
methidathion
methiocarb
methomyl
monocrotophos
nicotine
omethoate
oxamyl
oxydemeton-methyl
paris green
pentachlorophenol
pindone
pirimiphos-ethyl
propaphos
propetamphos
sodium arsenite
sodium cyanide
strychnine
tefluthrin
thallium sulfate
thiofanox
thiometon
triazophos
vamidothion
warfarin
zinc phosphide
CLASS 1b
* AC = acaridicide, FM = product for fumigation, F = fungicide, FST = fungicide for treatment of seeds, H = herbicide, I = insecticide, L = larvicide, MT = miticide, N = nematocide, O = other use for plant pathogens, R = rodenticide, -S = applicable to the soil.
RuralInvest Mod.3 EN 07.qxd 21-11-2007 11:56 Page 78
79
Appendix 1b: Checklists for Environmental Assessment
RuralInvest Mod.3 EN 07.qxd 21-11-2007 11:56 Page 79
80
IMPA
CT
S
Cul
tiva
tio
n o
f an
nua
l cro
ps
usin
g p
loug
hin
g:
Win
d an
d w
ater
ero
sion
due
to
plo
ughi
ng;
Wat
er e
rosi
on d
ue t
o sl
ope;
Loss
of
soil
fert
ility
.
Cul
tiva
tio
n o
f g
rain
cro
ps
usin
g h
oe:
Loss
of
soil
fert
ility
and
pro
lifer
atio
n of
wee
ds d
ueto
sho
rten
ed f
allo
w p
erio
ds;
Wat
er e
rosi
on d
ue t
o sl
ope.
Mo
no
cult
ures
:
Prol
ifera
tion
of p
ests
;
Soil
and
wat
er c
onta
min
atio
n re
sulti
ng f
rom
inte
nsiv
e p
estic
ide
use;
Soil
dep
letio
n;
Wat
er c
onta
min
atio
n re
sulti
ng f
rom
inte
nsiv
efe
rtili
zer
use.
MIT
IGA
TIO
N M
EASU
RES
Con
serv
atio
n A
gric
ultu
re b
ased
on
inte
grat
ed p
ract
ices
suc
h as
zero
till
age,
min
imum
till
age,
cro
p r
otat
ion
and
per
man
ent
soil
cove
r (f
or m
ore
deta
ils,
see
FAO
Con
serv
atio
n A
gric
ultu
rew
ebsi
te:
http
://w
ww
.fao.
org/
ag/a
gs/A
GSE
/Mai
n.ht
m;
Strip
cro
pp
ing
or c
onto
ur p
lant
ing,
by
i) di
rect
see
dlin
g, e
.g.
byp
lant
ing
coco
a m
othe
r tr
ees’
see
ds in
the
fur
row
s, o
r ii)
cont
ourin
g w
ith g
rass
(p
refe
rabl
y na
tive)
;
Eart
h bu
nds,
sto
ne li
nes,
con
tour
ter
race
s (u
sing
roc
ks,
trun
ks,
etc.
);
Prot
ectio
n of
cul
tivat
ed p
lots
with
fen
ces,
bor
der
gras
ses
and
win
dbre
aks.
Incr
ease
d fa
llow
per
iods
;
Use
of
com
pos
t an
d/or
gre
en m
anur
e (u
sing
legu
mes
) in
rot
atio
nw
ith g
rain
cro
ps
(e.g
. ve
lvet
bea
n in
rot
atio
n w
ith c
orn
imp
rove
sco
rn y
ield
s, p
rote
cts
the
soil
from
ero
sion
and
fro
m e
vap
orat
ion,
and
pre
vent
s th
e gr
owth
of
wee
ds;
besi
des,
har
vest
res
idue
isex
celle
nt f
odde
r);
Inte
r-cr
opp
ing
with
legu
min
ous
tree
s an
d or
ann
ual l
egum
inou
scr
ops;
Enric
hed
fallo
w w
ith le
gum
inou
s cr
ops.
Cro
p d
iver
sific
atio
n p
ract
ices
, in
ter-
crop
pin
g, r
elay
cro
pp
ing;
Cro
p r
otat
ion
pra
ctic
es;
Inte
grat
ed P
est
Man
agem
ent
(IPM
): s
ee b
elow
;
Cul
tivat
ion
of n
itrog
en f
ixin
g sp
ecie
s (e
.g.
legu
min
ous
pla
nts
that
fix n
itrog
en in
the
soi
l);
Use
of
gree
n m
anur
e.
MO
NIT
OR
ING
IN
DIC
AT
OR
S
Cha
nge
in t
he h
eigh
t of
roo
t p
edes
tals
;
Acc
umul
atio
n of
silt
/san
d at
the
foo
t of
bus
hes,
pos
ts a
nd f
ence
s, a
s w
ell a
s in
dow
nstr
eam
wat
erbo
dies
;
Dep
th o
f ril
ls/g
ullie
s;
Cha
nges
in y
ield
s an
d to
tal p
rodu
ctio
n;
Cha
nges
in t
he s
oil's
wat
er r
eten
tion
cap
acity
;
Dat
a on
sed
imen
t lo
ads
in s
trea
ms
and
dam
s if
avai
labl
e fr
om a
nea
rby
hydr
olog
ical
sta
tion.
Cha
nge
in h
umus
con
tent
of
soil;
Cha
nge
in t
he h
eigh
t of
roo
t p
edes
tals
;
Dep
th o
f ril
ls/g
ullie
s;
Cha
nges
in y
ield
s an
d to
tal p
rodu
ctio
n;
Dat
a on
sed
imen
t lo
ads
in s
trea
ms
if av
aila
ble
from
a ne
arby
hyd
rolo
gica
l sta
tion;
Ap
pea
ranc
e or
dis
app
eara
nce
of w
eeds
.
Ap
pea
ranc
e or
dis
app
eara
nce
of p
ests
;
Pest
man
agem
ent
pra
ctic
es,
incl
udin
g us
e le
vels
of
pes
ticid
es;
Are
a of
bar
ren
land
;
Cha
nge
in t
he h
eigh
t of
roo
t p
edes
tals
;
Dep
th o
f ril
ls/g
ullie
s;
Cha
nges
in y
ield
s;
Sedi
men
t lo
ads
in s
trea
ms
if da
ta a
vaila
ble
from
ane
arby
hyd
rolo
gica
l sta
tion.
TAB
LE 1
- C
rop
cul
tiva
tio
n:
Prac
tice
s as
soci
ated
wit
h e
nvi
ron
men
tal r
isks
. Po
ssib
le a
dve
rse
imp
acts
, m
itig
atio
n m
easu
res
and
ind
icat
ors
fo
r m
on
ito
rin
g.
RuralInvest Mod.3 EN 07.qxd 21-11-2007 11:56 Page 80
81
IMPA
CT
S
Use
of
pes
tici
des
:
Con
tam
inat
ion
of s
oil,
surf
ace
and
grou
nd w
ater
;
Ap
pea
ranc
e of
and
/or
incr
ease
in in
toxi
catio
nca
ses
amon
g fa
rm w
orke
rs o
r ru
ral p
opul
atio
ns;
Ap
pea
ranc
e of
and
/or
incr
ease
in c
ases
of
deat
h by
cont
amin
atio
n in
wild
flo
ra a
nd f
auna
, in
clud
ing
bene
ficia
l org
anis
ms
such
as
eart
h w
orm
s, t
erm
ites
and
pol
linat
ors;
Pest
icid
e re
sidu
es o
n cr
ops
affe
ctin
g p
ublic
hea
lthan
d p
rodu
ct m
arke
ting;
Old
pes
ticid
e st
ocks
tur
ning
into
tox
ic w
aste
.
Use
of
chem
ical
fer
tiliz
ers:
Det
erio
ratio
n in
gro
undw
ater
qua
lity
thro
ugh
infil
trat
ion
as a
res
ult
of in
app
rop
riate
ap
plic
atio
n;
Exce
ssiv
e gr
owth
of
alga
e an
d aq
uatic
pla
nts
inw
ater
bod
ies
due
to u
pst
ream
use
of
fert
ilize
rs,
lead
ing
to o
xyge
n de
ple
tion
and
even
tual
ly t
o fis
hki
ll.
MIT
IGA
TIO
N M
EASU
RES
Inte
grat
ed P
est
Man
agem
ent
(IPM
) to
red
uce
relia
nce
onp
estic
ides
.
IPM
ref
ers
to t
he c
aref
ul c
onsi
dera
tion
of a
ll av
aila
ble
pes
t co
ntro
lte
chni
que
s an
d su
bseq
uent
inte
grat
ion
of a
pp
rop
riate
mea
sure
sth
at d
isco
urag
e th
e de
velo
pm
ent
of p
est
pop
ulat
ions
and
kee
pp
estic
ides
and
oth
er in
terv
entio
ns t
o le
vels
tha
t ar
e ec
onom
ical
lyju
stifi
ed a
nd m
inim
ize
risks
to
hum
an h
ealth
and
the
envi
ronm
ent.
IPM
em
pha
size
s th
e gr
owth
of
a he
alth
y cr
op w
ithth
e le
ast
pos
sibl
e di
srup
tion
to a
gro-
ecos
yste
ms
and
enco
urag
esna
tura
l pes
t co
ntro
l mec
hani
sms.
Te
chni
que
s th
at c
an b
eap
plie
d un
der
an IP
M a
pp
roac
h in
clud
e e.
g.:
crop
rot
atio
n, c
rop
dive
rsifi
catio
n, s
elec
tion
of p
est
resi
stan
t cr
op v
arie
ties,
bio
logi
cal
cont
rol o
r ot
her
non-
chem
ical
tec
hniq
ues,
sel
ectiv
e p
estic
ide
use
as a
last
res
ort
cont
rol o
ptio
n.
For
mor
e de
tails
, se
e IP
M w
ebsi
te
http
://w
ww
.fao.
org/
glob
alip
mfa
cilit
y/ho
me.
htm
.
Whe
re p
estic
ide
use
rem
ains
nec
essa
ry:
subs
titut
ion
of
high
lyan
d m
oder
atel
y ha
zard
ous
and
broa
d-sp
ectr
um p
estic
ides
with
less
dan
gero
us a
nd m
ore
targ
et s
pec
ific
pro
duct
s, a
nd r
educ
ing
the
conc
entr
atio
n an
d nu
mbe
r of
ap
plic
atio
ns t
o a
min
imum
;
Know
ledg
e an
d en
forc
emen
t of
pes
ticid
e le
gisl
atio
n to
elim
inat
ep
rodu
cts
or a
pp
licat
ions
tha
t ar
e no
t p
erm
itted
an
d to
ens
ure
app
rop
riate
p
acka
ging
and
pro
per
labe
ling;
Prod
uct
know
ledg
e, u
se o
f ad
equa
te p
erso
nal p
rote
ctio
neq
uip
men
t du
ring
han
dlin
g an
d ap
plic
atio
n an
d co
rrec
t us
e of
app
rop
riate
ap
plic
atio
n eq
uip
men
t;
Prop
er s
tora
ge o
f p
estic
ides
.
Know
ledg
e ab
out
the
subs
tanc
es b
eing
use
d, c
orre
ct s
tora
ge a
ndap
plic
atio
n;
Redu
cing
fer
tiliz
er u
se o
r su
bstit
utin
g ch
emic
al f
ertil
izer
s w
ithm
anur
e or
oth
er o
rgan
ic f
ertil
izer
s.
MO
NIT
OR
ING
IN
DIC
AT
OR
S
Dir
ect:
Up
take
of
IPM
pra
ctic
es;
Inci
denc
e of
poi
soni
ng c
ases
and
pes
ticid
e re
late
dch
roni
c he
alth
pro
blem
s am
ong
farm
ers
and
wor
kers
usi
ng p
estic
ides
;
Inci
denc
e of
hea
lth p
robl
ems
due
to c
onsu
mp
tion
of p
rodu
ce o
r dr
inki
ng w
ater
con
tam
inat
ed w
ithp
estic
ide
resi
dues
.
Wat
er q
ualit
y in
drin
king
wat
er w
ells
an
d p
estic
ide
resi
dues
on
food
cro
ps;
Cha
nges
in p
opul
atio
ns o
f be
nefic
ial o
rgan
ism
s,w
ildlif
e, a
nd f
lora
.
Ind
irec
t:
Trai
ning
cou
rses
on
the
subj
ect;
Peop
le b
eing
tra
ined
on
the
subj
ect;
Req
uest
s fo
r te
chni
cal a
ssis
tanc
e on
the
sub
ject
;
Sale
s of
dan
gero
us p
estic
ides
in t
he a
rea;
Tota
l sal
es o
f p
estic
ides
in t
he a
rea.
Wat
er q
ualit
y in
drin
king
wat
er w
ells
(if
mea
sure
men
ts p
erfo
rmed
);
Visi
ble
chan
ges
in a
qua
tic p
lant
s in
dow
nstr
eam
wat
er b
odie
s;
Num
ber
of f
arm
ers
usin
g or
gani
c fe
rtili
zers
.
RuralInvest Mod.3 EN 07.qxd 21-11-2007 11:56 Page 81
82
IMPA
CT
S
Use
of
mac
hin
ery:
Soil
com
pac
tion;
Eros
ion
and
soil
degr
adat
ion.
Bur
nin
g o
f p
lan
t re
sid
ues
in t
he
fiel
ds:
Salin
izat
ion
of s
oil;
Eros
ion.
Soci
al im
pac
ts f
rom
lan
d u
se c
han
ges
:
Com
pet
ition
bet
wee
n di
ffere
nt u
sers
for
land
and
wat
er r
esou
rces
; e.
g. c
rop
far
mer
s an
d liv
esto
ckbr
eede
rs o
ver
the
use
of w
ater
sou
rces
or
mos
tfe
rtile
land
s.
Imp
act
of
tech
no
log
y ch
ang
es o
n w
om
en :
The
imp
act
of n
ew a
gric
ultu
ral
crop
s/p
ract
ices
/mac
hine
ry o
n tr
aditi
onal
div
isio
nof
labo
r be
twee
n m
en a
nd w
omen
;El
evat
ed v
ulne
rabi
lity
of w
omen
to
pes
ticid
ep
oiso
ning
.
MIT
IGA
TIO
N M
EASU
RES
Con
serv
atio
n A
gric
ultu
re (
see
abov
e).
Stop
bur
ning
of
resi
dues
and
ado
pt
the
follo
win
g:
cM
ulch
ing
with
cro
p r
esid
ues;
cU
se o
f p
lant
res
idue
s to
cre
ate
hum
us;
cIP
M t
o co
ntro
l pes
ts a
nd d
isea
ses
(see
abo
ve);
cA
gric
ultu
ral e
xten
sion
and
ap
plie
d re
sear
ch o
n th
ep
reve
ntio
n of
soi
l sal
iniz
atio
n.
Part
icip
ator
y la
nd u
se p
lann
ing
at v
illag
e le
vel;
Cre
atio
n of
wat
er u
ser
asso
ciat
ions
and
tra
inin
g of
the
irm
anag
emen
t co
mm
ittee
s, e
tc.;
Cro
p/l
ives
tock
inte
grat
ion
(use
of
crop
res
idue
s as
fod
der,
use
ofm
anur
e as
fer
tiliz
er,
etc.
).
Part
icip
atio
n of
wom
en in
tec
hnol
ogy
deve
lop
men
t an
dad
apta
tion;
M
ains
trea
min
g ge
nder
con
side
ratio
ns in
tra
inin
g an
d at
tent
ion
toge
nder
bal
ance
in t
rain
ing;
Acc
ess
of w
omen
to
agric
ultu
ral e
xten
sion
ser
vice
s.IP
M –
see
abo
ve.
MO
NIT
OR
ING
IN
DIC
AT
OR
S
Form
atio
n of
bar
ren
soil;
Cha
nge
in t
he h
eigh
t of
roo
t p
edes
tals
;A
ccum
ulat
ion
of s
ilt/s
and
at t
he f
oot
of b
ushe
s,p
osts
and
fen
ces,
as
wel
l as
in d
owns
trea
m w
ater
bodi
es;
Dep
th o
f ril
ls/g
ullie
s;C
hang
es in
yie
lds;
Sedi
men
t lo
ads
in s
trea
ms
if da
ta a
vaila
ble
from
ane
arby
hyd
rolo
gica
l sta
tion.
Dea
ths
or d
ecre
ased
pro
duct
ivity
of
pla
nts
and
soil
orga
nism
s du
e to
sal
inity
;C
hang
e in
the
hei
ght
of r
oot
ped
esta
ls;
Acc
umul
atio
n of
silt
/san
d at
the
foo
t of
bus
hes,
pos
ts a
nd f
ence
s, a
s w
ell a
s in
dow
nstr
eam
wat
erbo
dies
;D
epth
of
rills
/gul
lies;
Cha
nges
in y
ield
s;Se
dim
ent
load
s in
str
eam
s if
data
ava
ilabl
e fr
om a
near
by h
ydro
logi
cal s
tatio
n.
Num
ber
of la
nd u
se p
lans
pre
par
ed;
Num
ber
of m
anag
emen
t co
mm
ittee
s in
op
erat
ion.
Num
ber
of w
omen
par
ticip
ants
to
trai
ning
cou
rses
;C
hang
es in
pes
ticid
e us
e by
wom
en a
ndoc
curr
ence
of
pes
ticid
e p
oiso
ning
sym
pto
ms.
RuralInvest Mod.3 EN 07.qxd 21-11-2007 11:56 Page 82
83
IMPA
CT
S
Imp
acts
of
ove
rgra
zin
g:
Soil
com
pac
tion,
incr
ease
in s
urfa
ce r
un-o
ff an
der
osio
n du
e to
ove
rgra
zing
and
exc
essi
vetr
amp
ling;
Deg
rada
tion
of v
eget
atio
n an
d re
duct
ion
of m
ost
pal
atab
le s
pec
ies,
in p
artic
ular
aro
und
wat
erp
oint
s.
Low
erin
g of
wat
er t
able
due
to
incr
ease
dex
trac
tion
of g
roun
dwat
er t
hrou
gh c
attle
wel
ls;
Gro
undw
ater
con
tam
inat
ion
thro
ugh
catt
le w
ells
.
Def
ore
stat
ion
fo
r g
rass
lan
d e
stab
lish
men
t:
Biod
iver
sity
loss
;
Cha
nge
and
loss
of
natu
ral h
abita
ts.
MIT
IGA
TIO
N M
EASU
RES
Redu
ctio
n of
sto
ckin
g de
nsity
:
cSe
lect
ive
culli
ng o
f an
imal
s in
the
her
d;
cPa
stur
e ro
tatio
n, d
efer
red
graz
ing;
cFa
rm d
iver
sific
atio
n (e
.g.
agro
-tou
rism
).
Incr
easi
ng c
arry
ing
cap
acity
:
cPa
stur
e m
anag
emen
t an
d fe
rtili
zatio
n;
cSu
pp
lem
enta
ry f
orag
e p
rodu
ctio
n;
cSu
pp
lem
enta
ry f
eedi
ng;
cIn
clus
ion
of f
orag
e sh
rubs
and
tre
es.
Eros
ion
cont
rol:
cC
over
cro
ps
& d
irect
see
ding
;
cC
rop
res
idue
man
agem
ent
& t
reat
men
t;
cAv
oid
graz
ing
frag
ile a
reas
.
Elab
orat
ion
of d
roug
ht s
urvi
val s
trat
egie
s:
cLi
vest
ock
mar
kers
;
cTe
mp
oral
sla
ught
er h
ouse
s.
For
mor
e de
tails
, se
e Li
vest
ock,
Env
ironm
ent
and
Dev
elop
men
tw
ebsi
te h
ttp
://w
ww
.fao.
org/
lead
/.
Stra
tegi
c p
lace
men
t of
wat
er s
ourc
es;
Regu
latio
n of
wat
er u
se:
cont
rol o
f w
ater
poi
nt u
se,
limita
tion
ofw
ell c
apac
ity,
clos
ure
of p
erm
anen
t w
ater
sou
rces
dur
ing
the
rain
seas
on,
cov
erin
g of
wel
ls,
app
rop
riate
wat
erin
g st
ruct
ures
, w
ell
man
agem
ent
com
mitt
ees,
etc
.
Silv
opas
tora
l sys
tem
s fo
r co
nser
vatio
n of
bio
dive
rsity
and
car
bon
seq
uest
ratio
n;
Farm
div
ersi
ficat
ion.
MO
NIT
OR
ING
IN
DIC
AT
OR
S
Are
a ch
ange
s of
deg
rade
d p
astu
res;
Size
of
"des
ertif
icat
ion
circ
les"
aro
und
wat
er p
oint
s;
Cha
nge
in t
he h
eigh
t of
roo
t p
edes
tals
;
Acc
umul
atio
n of
silt
/san
d at
the
foo
t of
bus
hes,
pos
ts a
nd f
ence
s;
Dep
th o
f ril
ls/g
ullie
s;
Sedi
men
t lo
ads
in s
trea
ms
if da
ta a
vaila
ble
from
ane
arby
hyd
rolo
gica
l sta
tion;
Ani
mal
pop
ulat
ion
& d
ensi
ty;
Cha
nges
in w
eed
inci
denc
e.
Cha
nges
in w
ater
tab
le le
vels
in w
ells
;
Wat
er q
ualit
y in
drin
king
wat
er w
ells
(if
mea
sure
men
ts p
erfo
rmed
).
Are
a ch
ange
s in
for
este
d ar
eas
and
gras
slan
ds.
TAB
LE 2
- L
ives
tock
hus
ban
dry
: Pra
ctic
es a
ssoc
iate
d w
ith
en
viro
nm
enta
l ris
k.
Poss
ible
ad
vers
e im
pac
ts, m
itig
atio
n m
easu
res
and
ind
icat
ors
for
mon
itor
ing
.
RuralInvest Mod.3 EN 07.qxd 21-11-2007 11:56 Page 83
84
IMPA
CT
S
Con
tam
inat
ion
of a
nim
al p
rodu
cts
dest
ined
for
hum
an c
onsu
mp
tion.
Into
xica
tion
of w
orke
rs h
andl
ing
tick
kille
rs a
nd/o
rp
erso
ns u
sing
em
pty
bot
tles;
Wat
er c
onta
min
atio
n fr
om in
adeq
uate
dis
pos
al o
fch
emic
als;
Tick
res
ista
nce
to a
caric
ides
.
An
imal
bre
edin
g:
Redu
ctio
n of
agr
o-bi
odiv
ersi
ty d
ue t
o br
eed
choi
ces;
New
bre
eds
less
ada
pte
d to
loca
l con
ditio
ns.
Imp
act
on
wild
life:
Incr
ease
d ki
lling
of
wild
life
cons
ider
ed a
s p
ests
or
pre
dato
rs;
Com
pet
ition
for
foo
d an
d w
ater
res
ourc
es;
Incr
ease
in d
isea
ses;
Loss
of
habi
tat
or m
igra
tory
rou
tes.
Pollu
tio
n f
rom
an
imal
was
te:
Con
tam
inat
ion
of s
urfa
ce a
nd g
roun
d w
ater
s;O
dor
pro
blem
s &
gre
enho
use
gase
s.
Nut
rient
enr
ichm
ent
of s
oils
.
Soci
al im
pac
ts:
Soci
al a
nd c
ultu
ral c
hang
es d
ue t
o ch
ange
fro
mno
mad
ism
/tra
nshu
man
ce t
o st
able
live
stoc
kp
rodu
ctio
n.
MIT
IGA
TIO
N M
EASU
RES
Prep
arat
ion
of b
alan
ced
feed
s on
the
far
m.
Cho
ice
of t
ick
kille
r ch
emic
als,
met
hods
and
tim
ing
that
min
imiz
een
viro
nmen
tal i
mp
acts
(se
e al
so T
able
1,
on t
he u
se o
fp
estic
ides
);Tr
aini
ng a
nd a
war
enes
s-ra
isin
g of
live
stoc
k ow
ners
and
her
ders
on a
caric
ide
& in
sect
icid
e us
e an
d ha
ndlin
g.
Prom
otio
n of
loca
l bre
eds;
M
aint
aini
ng v
aria
bilit
y w
ithin
pop
ulat
ions
;U
ncon
vent
iona
l liv
esto
ck p
rodu
ctio
n (e
.g.
alp
aca,
llam
a).
Cre
atio
n of
pro
tect
ed a
reas
;Ra
nge
man
agem
ent
stra
tegi
es t
hat
min
imiz
e im
pac
ts o
n w
ildlif
e;A
gro-
tour
ism
;A
pp
rop
riate
met
hods
of
pes
t an
d p
reda
tor
cont
rol (
e.g.
tra
ps
inst
ead
of p
oiso
n, s
ee a
lso
Tabl
e 1
on p
estic
ides
).
Prop
er m
anur
e st
orag
e an
d m
anag
emen
t:c
Redu
ctio
n in
wat
er u
se;
cSe
par
atio
n of
sol
ids;
cPr
oper
sto
rage
unt
il ap
plic
atio
n tim
e;c
Ana
erob
ic f
erm
enta
tion
& b
ioga
s p
rodu
ctio
n.
Man
ure
app
licat
ion
to s
oils
at
reco
mm
ende
d fe
rtili
zer
rate
s;U
se o
f hi
gh y
ield
ing
crop
s.
Acc
ess
of m
obile
pas
tora
lists
to
vete
rinar
y an
d ot
her
serv
ices
;C
onsu
ltatio
n of
all
affe
cted
com
mun
ities
; Re
cogn
ition
of
trad
ition
al la
nd u
se r
ight
s an
d p
ract
ices
.
MO
NIT
OR
ING
IN
DIC
AT
OR
S
Che
mic
al a
naly
sis
of a
nim
al p
rodu
cts
dest
ined
for
hum
an c
onsu
mp
tion.
For
mon
itorin
g th
e us
e of
tic
k ki
llers
, se
e Ta
ble
1;
Wat
er q
ualit
y in
wat
er b
odie
s (if
mea
sure
men
tsp
erfo
rmed
).
Prop
ortio
n of
loca
l bre
eds
in c
attle
pop
ulat
ion;
Num
ber
of b
reed
s gr
own
in t
he a
rea.
Cas
es o
f w
ildlif
e ki
lling
and
poa
chin
g;N
umbe
r of
pre
dato
r p
oiso
ning
cas
es;
Size
of
Prot
ecte
d A
reas
.
Wat
er q
ualit
y in
str
eam
s;Pr
opor
tion
of f
arm
ers
with
man
ure
stor
age
faci
litie
s;Vo
lum
e of
bio
gas
pro
duce
d.
Nut
rient
con
cent
ratio
n in
soi
ls (
N,
P, K
);C
hang
es in
cro
p y
ield
s.
Use
of
ph
arm
aceu
tica
ls a
nd
hor
mon
es
(in
com
mer
cial
fee
d c
once
ntr
ates
) an
d a
cari
cid
es:
RuralInvest Mod.3 EN 07.qxd 21-11-2007 11:56 Page 84
85
IMPA
CT
S
Co
nst
ruct
ion
of
irri
gat
ion
infr
astr
uctu
re:
Redu
ctio
n of
min
imum
flo
w in
riv
ers,
affe
ctin
gaq
uatic
flo
ra a
nd f
auna
and
red
ucin
g w
ater
avai
labi
lity
dow
nstr
eam
;
Cha
nges
in t
he n
atur
al c
ours
e of
wat
erw
ays;
Soil-
and
tre
e-cu
ttin
g al
ong
ripar
ian
area
s w
here
wat
er w
ill b
e dr
awn
(up
take
for
irrig
atio
n),
resu
lting
in e
rosi
on a
long
riv
erba
nks;
Vert
ical
dra
inag
e as
soci
ated
with
hig
hco
ncen
trat
ion
of w
ells
for
pum
pin
g gr
ound
wat
eran
d th
e co
nseq
uent
low
erin
g of
wat
er t
able
.
Op
erat
ion
of
irri
gat
ion
sys
tem
:
Redu
ctio
n of
min
imum
flo
w in
riv
ers,
end
ange
ring
aqua
tic f
lora
and
fau
na a
nd r
educ
ing
wat
erav
aila
bilit
y do
wns
trea
m;
Wat
er lo
ggin
g (r
ise
of w
ater
tab
le)
asso
ciat
ed w
ithlo
w ir
rigat
ion
effic
ienc
y;
Ove
rexp
loita
tion
of g
roun
dwat
er t
hrou
gh w
ells
and
cons
eque
nt lo
wer
ing
of w
ater
tab
le;
Salin
izat
ion
or a
lkal
izat
ion
of s
oil;
Eros
ion;
Deg
rada
tion
of w
ater
qua
lity
in r
eser
voirs
or
rece
ivin
g w
ater
bod
ies
(alg
al b
loom
s, a
qua
ticw
eeds
, et
c.);
Incr
ease
in w
ater
born
e di
seas
es;
Dis
ease
tra
nsm
issi
on t
hrou
gh c
onta
min
ated
irrig
atio
n w
ater
;
MIT
IGA
TIO
N M
EASU
RES
Prop
er s
iting
and
par
ticip
ator
y p
lann
ing,
incl
udin
g st
udie
s on
wat
er a
vaila
bilit
y;
Com
mun
ity p
artic
ipat
ion
in d
esig
n an
d co
nstr
uctio
n(w
alkt
hrou
gh w
ith f
arm
ers
and
Part
icip
ator
y Ra
pid
Ap
pra
isal
(PRA
)) a
nd e
stab
lishm
ent
of w
ater
use
rs a
ssoc
iatio
n be
fore
cons
truc
tion;
Des
ign
of w
orks
so
as t
o m
inim
ize
the
need
to
chan
ge n
atur
alw
ater
cour
ses;
Soil
cons
erva
tion;
Con
trol
on
borin
g of
new
wel
ls;
Redu
ctio
n in
the
den
sity
of
wel
ls o
r lim
itatio
n of
pum
p c
apac
ity(it
sho
uld
be p
oint
ed o
ut t
hat
in t
he c
ase
of w
ater
logg
ing,
vert
ical
dra
inag
e m
ight
be
deem
ed n
eces
sary
to
low
er t
hegr
ound
wat
er le
vel).
Con
trol
of
irrig
atio
n w
ater
vol
umes
, re
spec
ting
min
imum
flo
ws
and
aqui
fer
cap
acity
;
Op
erat
ion
and
mai
nten
ance
pla
ns f
or ir
rigat
ion
infr
astr
uctu
re;
Agr
icul
tura
l ext
ensi
on,
trai
ning
and
ap
plie
d re
sear
ch o
n so
ilsa
liniz
atio
n an
d re
late
d is
sues
(w
ater
logg
ing,
alk
aliz
atio
n, e
tc);
Mic
ro-w
ater
shed
man
agem
ent;
Qua
lity
test
s on
irrig
atio
n w
ater
, in
clud
ing
mon
itorin
g of
pes
ticid
e co
ntam
inat
ion;
Part
icul
arly
for
larg
er s
chem
es:
good
irrig
atio
n m
anag
emen
t, i.
e.,
a m
ore
ratio
nal a
nd e
ffici
ent
use
of ir
rigat
ion
wat
er,
by:
a) c
lose
lym
atch
ing
irrig
atio
n de
man
ds a
nd s
upp
ly t
o re
duce
see
pag
e an
din
crea
se ir
rigat
ion
effic
ienc
y; b
) p
rovi
ding
dra
inag
e if
wat
er is
of
good
qua
lity,
and
c)
mai
ntai
ning
can
als
to p
reve
nt s
eep
age,
and
redu
ce in
effic
ienc
ies
resu
lting
fro
m s
iltat
ion
and
wee
d;
MO
NIT
OR
ING
IN
DIC
AT
OR
S
Cha
nges
in t
he le
vel o
f la
ke/r
iver
flo
w;
Cha
nges
in f
ish
catc
hes
from
the
affe
cted
wat
erbo
dy;
Are
a of
exp
osed
riv
erba
nks;
Fall
of w
ater
tab
le in
wel
ls;
Cha
nge
in t
he h
eigh
t of
roo
t p
edes
tals
;
Acc
umul
atio
n of
silt
/san
d at
the
foo
t of
bus
hes,
pos
ts a
nd f
ence
s, a
s w
ell a
s in
dow
nstr
eam
wat
erbo
dies
;
Dep
th o
f ril
ls/g
ullie
s;
Sedi
men
t lo
ads
in s
trea
ms
if da
ta a
vaila
ble
from
ane
arby
hyd
rolo
gica
l sta
tion.
Cha
nges
in t
he le
vel o
f la
ke/r
iver
flo
w;
Cha
nges
in f
ish
catc
hes
from
the
affe
cted
wat
erbo
dy;
Cha
nges
in w
ater
tab
le in
wel
ls;
Volu
me
of w
ater
use
d p
er h
ecta
re;
Visi
ble
chan
ges
in t
he w
ater
qua
lity
in r
ecei
ving
wat
er b
odie
s;
Wat
er q
ualit
y in
drin
king
wat
er w
ells
(if
mea
sure
men
ts p
erfo
rmed
);
Cha
nge
in t
he a
rea
of b
arre
n la
nds;
Cha
nge
in t
he h
eigh
t of
roo
t p
edes
tals
;
Acc
umul
atio
n of
silt
/san
d at
the
foo
t of
bus
hes,
pos
ts a
nd f
ence
s;
Dep
th o
f ril
ls/g
ullie
s;
TAB
LE 3
- S
mal
l-sca
le ir
rig
atio
n in
fras
truc
ture
: Pra
ctic
es a
ssoc
iate
d w
ith
en
viro
nm
enta
l ris
k. P
ossi
ble
ad
vers
e im
pac
ts, m
itig
atio
n m
easu
res
and
ind
icat
ors
for
mon
itor
ing
.
Smal
l-sca
le ir
rigat
ion
may
incl
ude
one
of t
he fo
llow
ing
cate
gorie
s: r
un-o
f-riv
er s
chem
es, s
mal
l res
ervo
irs o
r gr
ound
wat
er s
chem
es (
deep
and
sha
llow
wel
ls).
RuralInvest Mod.3 EN 07.qxd 21-11-2007 11:56 Page 85
86
IMPA
CT
S
Con
flict
s ov
er t
he u
se o
f w
ater
and
irrig
ated
land
;
Uns
usta
inab
le c
rop
pro
duct
ion
and
exce
ssiv
e us
eof
pes
ticid
es,
resu
lting
in w
ater
con
tam
inat
ion
and
dim
inis
hing
ret
urns
on
inve
stm
ent
in t
he ir
rigat
ion
sche
me.
MIT
IGA
TIO
N M
EASU
RES
Trai
ning
in s
anita
tion
and
hygi
ene;
Prot
ectio
n of
can
als
from
live
stoc
k;
Con
sulta
tion
of a
ll af
fect
ed c
omm
uniti
es,
esta
blis
hmen
t of
man
agem
ent
com
mitt
ees,
etc
.
IPM
– s
ee T
able
1.
MO
NIT
OR
ING
IN
DIC
AT
OR
S
Dea
ths
or d
ecre
ased
pro
duct
ivity
of
pla
nts
and
soil
orga
nism
s du
e to
sal
inity
;
Alk
alin
ity:
incr
ease
in s
oil p
H;
Num
ber
of o
per
atio
n an
d m
aint
enan
ce p
lans
;
Num
ber
of m
icro
-wat
ersh
ed m
anag
emen
t p
lans
;
Cha
nges
in w
ater
-rel
ated
dis
ease
leve
ls;
Num
ber
of s
erio
us la
nd u
se c
onfli
cts;
Pest
icid
e re
sidu
es in
wat
er;
Pest
man
agem
ent
pra
ctic
es a
nd u
se le
vels
of
pes
ticid
es.
Op
erat
ion
of
irri
gat
ion
sys
tem
:
RuralInvest Mod.3 EN 07.qxd 21-11-2007 11:56 Page 86
87
IMPA
CT
S
Ag
ro-p
roce
ssin
g:
Con
tam
inat
ion
of s
urfa
ce a
nd
grou
nd w
ater
fro
mw
aste
wat
er;
Ove
r-ex
trac
tion
of s
urfa
ce a
nd g
roun
d w
ater
s;
Air
pol
lutio
n;
Noi
se a
nd o
dor
pol
lutio
n.
Con
tam
inat
ion
of p
rodu
cts
with
pes
ticid
es d
ue t
oim
pro
per
pos
t-ha
rves
t p
est
cont
rol.
Con
tam
inat
ion
of t
he e
nviro
nmen
t du
e to
accu
mul
atio
n of
sol
id w
aste
, in
trod
uctio
n of
haza
rdou
s w
aste
, an
d/or
dec
omp
ositi
on o
f or
gani
cm
ater
ials
.
Def
icie
nt
hyg
ien
ic p
ract
ices
:
Con
tam
inat
ion
of p
roce
ssed
foo
dstu
ffs.
MIT
IGA
TIO
N M
EASU
RES
Loca
tion
of a
gro-
indu
strie
s in
zon
es w
here
wat
er s
upp
ly c
an b
een
sure
d an
d w
hich
hav
e se
wag
e an
d w
aste
wat
er t
reat
men
tsy
stem
s;
Min
imiz
atio
n of
wat
er a
nd c
hem
ical
use
;
Prom
otio
n of
tra
nsfo
rmat
ion
pro
cess
es b
ased
on
bio-
degr
adab
lesu
bsta
nces
;
Use
of
"cle
an"
pro
duct
ion
tech
nolo
gies
;
Trea
tmen
t of
was
tew
ater
, an
d at
mos
phe
ric e
mis
sion
s;
Aco
ustic
pro
tect
ion
met
hods
in p
lant
s th
at c
reat
e ex
cess
ive
nois
e;
Non
-che
mic
al p
ost-
harv
est
pes
t co
ntro
l.
Use
of
orga
nic
was
te a
s fe
rtili
zer
on a
gric
ultu
ral/
pas
ture
soi
ls;
Redu
ctio
n of
sol
id w
aste
thr
ough
the
use
of
clea
ner
tech
nolo
gy,
recy
clin
g re
sidu
es,
etc.
;
Trea
tmen
t an
d di
spos
al o
f so
lid w
aste
acc
ordi
ng t
o th
ere
gula
tions
on
solid
was
te m
anag
emen
t;
Prop
er t
reat
men
t an
d di
spos
al o
f ha
zard
ous
was
te (
disp
osal
inre
gula
ted
land
fills
).
Stric
t hy
gien
ic s
tand
ards
;
Prod
uct
qua
lity
cont
rol;
Trai
ning
of
wor
kers
.
MO
NIT
OR
ING
IN
DIC
AT
OR
S
Volu
me
of w
ater
use
;
Cha
nges
in t
he le
vel o
f la
ke/r
iver
whe
re t
he w
ater
is d
raw
n;
Cha
nges
in w
ater
tab
le le
vel i
n w
ells
;
Visi
ble
chan
ges
in t
he w
ater
qua
lity
in r
ecei
ving
wat
er b
odie
s;
Cha
nges
in f
ish
catc
hes
from
affe
cted
wat
er b
odie
s;
Wat
er q
ualit
y in
drin
king
wat
er w
ells
(if
mea
sure
men
ts p
erfo
rmed
).
For
bigg
er p
lant
s (in
add
ition
to
the
abov
e):
Qua
ntity
and
qua
lity
of w
aste
wat
er d
isch
arge
s;
Qua
lity
of a
ir em
issi
ons.
Com
pla
ints
on
nois
e an
d od
or f
rom
loca
lp
opul
atio
ns;
Che
mic
al a
naly
sis
of p
rodu
cts
dest
ined
for
hum
anco
nsum
ptio
n.
Volu
me
of s
olid
was
te (
not
recy
cled
);
Volu
me
of o
rgan
ic w
aste
(no
t re
used
);
Volu
me
of h
azar
dous
was
te;
Wat
er q
ualit
y in
drin
king
wat
er w
ells
(if
mea
sure
men
ts p
erfo
rmed
);
Fina
l dis
pos
al o
f w
aste
(re
gula
ted
or u
nreg
ulat
edla
ndfil
ls).
Che
mic
al a
nd b
acte
riolo
gica
l ana
lysi
s on
foo
dstu
ffs.
TAB
LE 4
- A
gro
-ind
ustr
y: P
ract
ices
ass
ocia
ted
wit
h e
nvi
ron
men
tal r
isk.
Pos
sib
le a
dve
rse
imp
acts
, mit
igat
ion
mea
sure
s an
d in
dic
ator
s fo
r m
onit
orin
g.
RuralInvest Mod.3 EN 07.qxd 21-11-2007 11:56 Page 87
88
IMPA
CT
S
Def
ores
tatio
n in
for
ests
nea
r ag
ro-in
dust
ry;
Ince
ntiv
es f
or d
efor
esta
tion
for
sale
to
agro
-in
dust
ry;
Air
pol
lutio
n.
Ch
ang
es in
live
liho
od
s:
Dec
reas
ed d
eman
d fo
r ce
rtai
n ag
ricul
tura
lp
rodu
cts
or f
or m
icro
-sca
le a
gro-
pro
cess
ing.
MIT
IGA
TIO
N M
EASU
RES
Use
of
alte
rnat
ive
ener
gy s
ourc
es;
Use
of
ener
gy e
ffici
ent
equi
pm
ent;
Use
of
agro
-res
idue
s as
fue
l;
Woo
dfue
l pla
ntat
ions
(bu
t se
e Ta
ble
5).
Con
sulta
tion
and
par
ticip
atio
n of
the
who
le c
omm
unity
inp
roje
ct p
rep
arat
ion.
MO
NIT
OR
ING
IN
DIC
AT
OR
S
Volu
me
of f
uelw
ood
use
per
pla
nt;
Size
of
degr
aded
for
est
arou
nd t
he p
lant
.
Co
nsu
mp
tio
n o
f fu
elw
oo
d in
ag
ro-i
nd
ustr
y:
RuralInvest Mod.3 EN 07.qxd 21-11-2007 11:56 Page 88
89
IMPA
CT
S
Esta
blis
hm
ent
of
fore
st p
lan
tati
on
s:
Redu
ctio
n or
loss
of
bio-
dive
rsity
.
Soil
eros
ion
durin
g la
nd p
rep
arat
ion.
Silta
tion
of s
trea
ms.
Soil
com
pac
tion.
Redu
ctio
n in
str
eam
flo
w a
nd lo
wer
ing
of t
hew
ater
tab
le.
Soil
cont
amin
atio
n du
e to
use
of
herb
icid
es a
ndin
sect
icid
es.
MIT
IGA
TIO
N M
EASU
RES
Avoi
d cl
earin
g in
dige
nous
for
est;
Giv
e co
mp
lete
pro
tect
ion
to c
ritic
al h
abita
ts;
If ad
equa
te s
amp
les
of t
he o
rigin
al v
eget
atio
n do
not
exi
stou
tsid
e th
e p
lant
atio
n, c
reat
e p
rote
ctio
n ar
eas
(set
-asi
des)
of
rep
rese
ntat
ive
sam
ple
s (1
0%)
insi
de t
he p
lant
atio
n.
Plan
t up
as
soon
as
pos
sibl
e af
ter
land
cle
arin
g.
Do
not
clea
r st
eep
, un
stab
le s
lop
es o
r hi
ghly
ero
sive
soi
ls,
and
limit
site
pre
par
atio
n to
the
dry
sea
son.
If p
loug
hing
is n
eede
d, it
sho
uld
be d
one
alon
g th
e co
ntou
rus
ing
trac
tors
with
flo
tatio
n tir
es.
Con
serv
e al
l rip
aria
n fo
rest
s (a
reas
loca
ted
on t
he b
anks
of
river
s,cr
eeks
and
sp
rings
); p
lant
with
indi
geno
us s
pec
ies;
Con
serv
e al
l wet
land
s an
d m
arsh
es.
Ensu
re t
hat
only
the
cor
rect
dos
age
of h
erbi
cide
s an
d in
sect
icid
esar
e us
ed,
that
wor
kers
are
pro
per
ly t
rain
ed in
the
ir us
e, a
ndcl
osel
y su
per
vise
fie
ld o
per
atio
ns.
MO
NIT
OR
ING
IN
DIC
AT
OR
S
Fiel
d in
spec
tion/
map
s
Cha
nges
in p
opul
atio
ns o
f In
dica
tor
spec
ies
Prot
ectio
n A
reas
iden
tifie
d in
man
agem
ent
pla
n.
Incr
ease
in a
reas
sub
ject
to
eros
ion
and
dep
th o
fril
ls/g
ullie
s.
Sedi
men
t lo
ads
in s
trea
ms.
Pres
ence
of
hard
pan
(i.e
. so
il/su
bsoi
l con
ditio
n in
whi
ch t
he s
oil g
rain
s be
com
e ce
men
ted
toge
ther
by s
uch
bond
ing
agen
ts a
s iro
n ox
ide
and
calc
ium
carb
onat
e, f
orm
ing
a ha
rd,
imp
ervi
ous
mas
s).
Cha
nges
in d
ry s
easo
n w
ater
leve
ls a
nd w
ater
tab
lele
vel;
Man
agem
ent
pla
n an
d fie
ld in
spec
tion.
Leve
l of
cont
amin
ants
in g
roun
d w
ater
and
stre
ams.
TAB
LE 5
- S
mal
l-sca
le f
ores
try
oper
atio
ns:
Pra
ctic
es a
ssoc
iate
d w
ith
en
viro
nm
enta
l ris
k. P
ossi
ble
ad
vers
e im
pac
ts, m
itig
atio
n m
easu
res
and
ind
icat
ors
for
mon
itor
ing
.
All t
ree
plan
tatio
ns o
f one
hec
tare
and
abo
ve, a
nd a
ll fo
rest
har
vest
ing
oper
atio
ns s
houl
d be
car
ried
out
in a
ccor
danc
e w
ith a
n ap
prov
ed s
impl
e m
anag
emen
t pl
an.
Each
man
agem
ent
pla
nsh
ould
incl
ude
an o
utlin
e en
viro
nmen
tal a
sses
smen
t, w
hich
sho
uld
pres
crib
e m
any
of t
he m
itiga
tion
mea
sure
s lis
ted
belo
w. W
here
pos
sible
,sm
all-s
cale
ope
rato
rs s
houl
d be
enc
oura
ged
to fo
rm c
oope
rativ
es o
r pr
oduc
er a
ssoc
iatio
ns/o
rgan
izat
ions
so
as t
o re
duce
man
agem
ent
cost
s. It
wou
ld a
lso fa
cilit
ate
the
intr
oduc
tion
of fo
rest
cer
tific
atio
n, a
pro
cess
tha
t ca
n co
nfirm
tha
t th
e fo
rest
pro
duct
s ar
e be
ing
harv
este
d fr
om s
usta
inab
le s
ourc
es. T
his
is es
peci
ally
impo
rtan
t fo
rpr
oduc
ts d
estin
ed fo
r ex
port
.
RuralInvest Mod.3 EN 07.qxd 21-11-2007 11:56 Page 89
90
IMPA
CT
S
Incr
ease
d in
cide
nce
of p
ests
and
dis
ease
s.
Wild
fire
s.
Use
of
exo
tic
spec
ies
in p
lan
tati
on
s:
Cha
nges
in s
oil s
truc
ture
and
loss
of
fert
ility
.
Redu
ced
stre
am f
low
and
low
erin
g of
wat
er t
able
.
Incr
ease
d ris
k of
pes
ts a
nd d
isea
ses.
Redu
ctio
n or
loss
of
biod
iver
sity
, es
pec
ially
inna
tura
l for
est
area
s.
Frag
men
tatio
n of
hab
itats
and
dis
rup
tion
ofbi
olog
ical
cor
ridor
s.
Fore
st/e
cosy
stem
deg
rada
tion.
Unc
ontr
olle
d hu
man
set
tlem
ent
and
defo
rest
atio
n.
MIT
IGA
TIO
N M
EASU
RES
Use
mix
ed s
pec
ies
pla
ntat
ions
;
Imp
lem
ent
a si
mp
le,
ocul
ar s
yste
m o
f p
est
and
dise
ase
mon
itorin
g.
Cle
ar f
irebr
eak
in t
he a
rea
if bu
rnin
g is
to
be u
sed
for
clea
ring
and
keep
ade
qua
te la
bor
avai
labl
e to
con
trol
fire
s.
If p
ossi
ble,
use
exo
tic s
pec
ies
in a
grof
ores
try/
silv
opas
tora
l sys
tem
son
ly,
and
use
only
org
anic
fer
tiliz
ers.
Con
serv
e rip
aria
n fo
rest
and
wet
land
s; u
se w
ider
tre
e sp
acin
g.
Imp
lem
ent
sim
ple
ocu
lar
syst
ems
of p
est
and
dise
ase
mon
itorin
g.
Prod
ucts
fro
m n
atur
al f
ores
t m
ust
be h
arve
sted
in a
ccor
danc
ew
ith a
n ap
pro
ved
harv
estin
g p
lan
whi
ch m
ust
be b
ased
on
grow
th d
ata
and
inve
ntor
ies;
logg
ing
mus
t in
clud
e p
reha
rves
ting
clim
ber
cutt
ing,
min
imum
dia
met
ers
limits
, an
adeq
uate
fel
ling
cycl
e, a
nnua
l cou
pes
, di
rect
iona
l fel
ling,
wel
lp
lann
ed s
kid
trai
ls a
nd p
rote
ctio
n ar
eas.
Iden
tify
criti
cal h
abita
ts a
nd p
rohi
bit
inte
rven
tion,
avo
id s
ensi
tive
area
s an
d p
rovi
de p
assa
gew
ays
to li
nk c
orrid
ors.
Har
vest
in a
ccor
danc
e w
ith p
resc
riptio
ns o
f m
anag
emen
t p
lan,
and
have
the
op
erat
ion
cert
ified
;
In p
lant
atio
ns,
avoi
d ar
eas
of n
atur
al v
eget
atio
n.
Ensu
re t
he e
xist
ence
of
enfo
rcea
ble
pro
per
ty r
ight
s an
d th
ein
stitu
tiona
l cap
acity
/com
mitm
ent
to c
ontr
ol s
ettle
men
t.
MO
NIT
OR
ING
IN
DIC
AT
OR
S
Incr
ease
or
decr
ease
in t
he in
cide
nce
of p
ests
,da
mag
e to
tre
es.
Fire
rec
ords
.
Nut
rient
leve
ls in
soi
ls o
rgan
ic c
onte
nt a
nd p
H o
fso
il.
Cha
nges
in d
ry s
easo
n w
ater
leve
ls in
wel
ls a
nd d
ryse
ason
flo
w in
str
eam
s.
Incr
ease
or
decr
ease
in p
est
and
pla
nt d
isea
sele
vels
.
Ap
pro
ved
man
agem
ent
pla
n an
d, if
pra
ctic
al,
cert
ifica
tion
rece
ived
.
Inve
ntor
ies
to m
onito
r p
opul
atio
ns o
f in
dica
tor
spec
ies.
Man
agem
ent
pla
n an
d fie
ld r
ecor
ds.
Cas
es o
f ne
w il
lega
l hum
an s
ettle
men
ts;
Exis
tenc
e of
legi
slat
ion/
inst
itutio
ns r
egul
atin
ghu
man
set
tlem
ents
.
Esta
blis
hm
ent
of
fore
st p
lan
tati
on
s:
Fore
st h
arve
stin
g,
incl
udin
g w
oo
d a
nd
n
on
-wo
od
pro
duc
ts:
RuralInvest Mod.3 EN 07.qxd 21-11-2007 11:56 Page 90
91
IMPA
CT
S
Con
flict
s w
ith t
radi
tiona
l use
rs.
Soil
com
pac
tion
and
eros
ion.
Silta
tion
of s
trea
ms.
Illeg
al h
untin
g an
d ac
cide
ntal
fire
s.
Smal
l sca
le p
roce
ssin
g p
lan
ts:
Air
pol
lutio
n –
carb
on d
ioxi
de,
carb
on m
onox
ide
smok
e an
d du
st.
Soil
and
wat
er p
ollu
tion
– ex
trac
tives
of
bark
,w
ood
pre
serv
ativ
es,
addi
tives
, sa
wdu
st,
char
coal
,
acid
s, t
ars,
veh
icle
fue
l oils
and
lubr
ican
ts.
Noi
se.
Ind
igen
ous
fo
rest
-dep
end
ent
peo
ple
:
Cha
nges
in li
velih
oods
and
cul
tura
l ide
ntity
;
Spre
ad o
f in
fect
ious
dis
ease
s.
MIT
IGA
TIO
N M
EASU
RES
Def
ine
and
ensh
rine
trad
ition
al u
ser
right
s in
man
agem
ent
pla
n.
Use
cab
le w
ays
inst
ead
of r
oads
;
Whe
re r
oads
are
the
onl
y al
tern
ativ
e, t
hey
mus
t be
wel
l pla
nned
and
cons
truc
ted
in a
ccor
danc
e w
ith t
echn
ical
sp
ecifi
catio
nsap
pro
pria
te t
o lo
cal c
ondi
tions
;
Min
imiz
e ca
nop
y di
stur
banc
e an
d da
mag
e to
the
und
erst
orey
thro
ugh
bett
er r
oad
alig
nmen
t;
Use
ani
mal
ext
ract
ion.
Con
serv
e rip
aria
n fo
rest
and
min
imiz
e ca
nop
y an
d un
ders
tore
ydi
stur
banc
e.
Imp
lem
ent
envi
ronm
enta
l edu
catio
n p
rogr
ams
for
fore
st w
orke
rsan
d fo
rest
com
mun
ities
in a
nd a
roun
d fo
rest
;
Ensu
re t
hat
adeq
uate
lega
l pro
tect
ion
exis
ts t
o co
ntro
l hun
ting.
Legi
slat
ion,
em
issi
on c
ontr
ol,
cycl
one
dust
rem
oval
, us
e of
hydr
opow
er.
Legi
slat
ion,
sp
ill p
onds
, oi
l tra
ps,
rec
over
y of
was
te w
ood.
Legi
slat
ion,
car
eful
site
pla
nnin
g, in
sula
tion,
noi
se a
bate
men
t.
Car
eful
site
sel
ectio
n av
oidi
ng in
dige
nous
are
as,
par
ticip
atio
n of
indi
geno
us p
eop
le in
pro
ject
pla
nnin
g, in
dige
nous
peo
ple
s’ p
lan.
MO
NIT
OR
ING
IN
DIC
AT
OR
S
Man
agem
ent
pla
n.
Man
agem
ent
pla
n an
d fie
ld o
bser
vatio
ns;
Eros
ion
indi
cato
rs (
see
abov
e ta
bles
).
Sedi
men
t lo
ad in
str
eam
s.
Bush
mea
t co
nsum
ptio
n su
rvey
s, s
pec
ies
inve
ntor
ies
and
fore
st f
ire r
ecor
ds.
Air
qua
lity
mon
itorin
g.
Soil
and
wat
er q
ualit
y m
onito
ring.
Noi
se le
vel m
onito
ring;
Com
pla
ints
fro
m lo
cal p
opul
atio
ns.
Con
sulta
tions
and
wor
ksho
ps
with
loca
l peo
ple
;
Med
ical
rec
ords
.
Fore
st h
arve
stin
g,
incl
udin
g w
oo
d a
nd
n
on
-wo
od
pro
duc
ts:
RuralInvest Mod.3 EN 07.qxd 21-11-2007 11:56 Page 91
92
IMPA
CT
S
Fire
s in
for
est
and
gras
slan
ds.
Co
nst
ruct
ion
of
smal
l-sc
ale
infr
astr
uctu
re
(tra
ils,
sig
nb
oar
ds,
cam
psi
tes
etc.
):
Dis
turb
ance
of
wild
life;
Eros
ion
asso
ciat
ed t
o tr
ail c
onst
ruct
ion;
Incr
ease
d hu
man
pre
senc
e in
isol
ated
are
as t
hat
may
lead
to
illeg
al lo
ggin
g or
land
con
vers
ion.
Un
sust
ain
able
co
nsu
mp
tio
n o
f ve
get
atio
n,
wild
life
and
oth
er n
atur
al r
eso
urce
s:
Loss
of
bio-
dive
rsity
;Lo
ss o
f na
tura
l res
ourc
es.
Solid
was
te:
Acc
umul
atio
n of
gar
bage
and
rub
bish
at
tour
ist
site
s.
Soci
al a
nd
eco
no
mic
imp
acts
:
Imp
act
on in
dige
nous
and
loca
l com
mun
ities
.
MIT
IGA
TIO
N M
EASU
RES
Con
stru
ctio
n of
pro
per
cam
psi
tes
and
firep
lace
s;
Regu
latio
n, s
uper
visi
on a
nd c
ontr
ol o
f to
uris
t ac
tiviti
es.
Prop
er s
iting
avo
idin
g ec
olog
ical
ly s
ensi
tive
area
s;
Awar
enes
s-ra
isin
g an
d tr
aini
ng o
f lo
cal c
omm
uniti
es a
nd v
isito
rs;
Sche
mes
for
sha
ring
bene
fits
from
eco
tour
ism
.
Proh
ibiti
on/r
estr
ictio
n on
tou
rism
in s
ensi
tive
site
s;
Rest
rictio
n on
the
ext
ract
ion
of p
lant
s or
oth
er r
esou
rces
inPr
otec
ted
Are
as (
in c
onsi
sten
cy w
ith t
heir
man
agem
ent
rule
s, s
eese
ctio
n E
of c
hap
ter
5);
Proh
ibiti
on o
n th
e hu
ntin
g or
rem
oval
of
enda
nger
ed p
lant
s an
dan
imal
s; P
rohi
bitio
n/re
stric
tion
on c
oral
col
lect
ion
and/
orex
trac
tion
or o
ther
mar
ine
life;
Awar
enes
s-ra
isin
g of
vis
itors
and
gui
des;
Sup
ervi
sion
and
con
trol
of
tour
ist
activ
ities
.
Prop
er w
aste
col
lect
ion
faci
litie
s an
d se
rvic
es
Invo
lvem
ent
of t
hese
com
mun
ities
in p
roje
ct d
esig
n;
Bene
fit-s
harin
g sc
hem
es.
MO
NIT
OR
ING
IN
DIC
AT
OR
S
Cha
nges
in t
he f
req
uenc
y an
d se
verit
y of
for
est
fires
.
Cha
nges
in o
ccur
renc
e of
wild
ani
mal
s;
Dep
th o
f ril
ls/g
ullie
s al
ong
trai
ls;
Cas
es o
f ill
egal
logg
ing
or la
nd c
onve
rsio
n;
Trai
ning
ses
sion
s fo
r lo
cal c
omm
uniti
es.
Wild
life
mon
itorin
g;
Cas
es o
f ill
egal
hun
ting;
Cas
es o
f co
ral c
olle
ctio
n;
Deg
rada
tion/
disa
pp
eara
nce
of p
lant
s, c
oral
s or
othe
r re
sour
ces.
Occ
urre
nce
of n
on-c
olle
cted
was
te a
t si
tes.
Stak
ehol
der
cons
ulta
tions
dur
ing
pro
ject
des
ign.
TAB
LE 6
- E
coto
uris
m: P
ract
ices
ass
ocia
ted
wit
h e
nvi
ron
men
tal r
isk.
Pos
sib
le a
dve
rse
imp
acts
, mit
igat
ion
mea
sure
s an
d in
dic
ator
s fo
r m
onit
orin
g.
Cam
psi
tes
and
co
oki
ng
fir
es w
ith
out
ad
equa
tep
rote
ctiv
e m
easu
res:
RuralInvest Mod.3 EN 07.qxd 21-11-2007 11:56 Page 92
93
IMPA
CT
S
Pon
d c
ultu
re:
Con
tam
inat
ion
of d
owns
trea
mw
ater
-bod
ies
in p
artic
ular
whe
n dr
aini
ng p
onds
due
to e
xces
sive
org
anic
load
ing
and
accu
mul
atio
nin
pon
d w
ater
and
pon
d bo
ttom
sed
imen
ts;
Hig
her
risk
of d
isea
ses
amon
g cu
ltiva
ted
fish
rela
ted
to s
tres
s an
d, e
vent
ually
, in
nei
ghbo
ring
wild
pop
ulat
ions
;
New
bac
teria
l dis
ease
s du
e to
the
use
of
med
icat
ed f
eeds
.
Flo
atin
g c
ages
: co
ntin
uous
pol
lutio
n of
surr
ound
ing
wat
ers
and
bott
oms
whe
n ca
ges
are
in s
hallo
w w
ater
s;
Imp
act
on lo
cal f
auna
fro
m e
scap
es f
rom
cag
es.
Sem
i-in
ten
sive
an
d e
xten
sive
cul
ture
sys
tem
s
Larg
e se
ed m
orta
lity
rate
s of
non
tar
get
spec
ies
due
to t
he c
olle
ctio
n of
shr
imp
or
fish
seed
fro
mth
e w
ild;
Des
truc
tion
of m
angr
oves
and
wet
land
s fo
rco
nstr
uctio
n of
coa
stal
pon
ds;
exp
osur
e of
aci
dsu
lfate
soi
ls;
acce
lera
ted
coas
tal e
rosi
on b
yre
duct
ion
of m
angr
ove
fore
st;
Soils
and
gro
undw
ater
sal
iniz
atio
n du
e to
per
cola
tion
of s
altw
ater
;El
imin
atio
n/re
duct
ion
of lo
cal s
pec
ies
due
to t
hein
trod
uctio
n of
exo
tics
for
stoc
king
pur
pos
es;
Intr
oduc
tion
of d
isea
ses
due
to t
rans
fer/
imp
ort
ofse
ed.
MIT
IGA
TIO
N M
EASU
RES
Prop
er s
iting
of
pon
ds a
nd c
ages
avo
idin
g se
nsiti
ve w
ater
bod
ies;
Dis
tanc
e be
twee
n ca
ges
and
suffi
cien
t de
pth
to
redu
ce im
pac
ton
bot
tom
;
Use
of
rese
rvoi
rs f
or t
reat
men
t of
effl
uent
s in
pon
d fa
rms
or u
seof
pon
d re
circ
ulat
ing
syst
ems
to t
reat
wat
er.
Clo
sed
syst
ems
(i.e.
with
out
efflu
ent
disc
harg
e)
are
mor
e de
sira
ble
in in
tens
ive
syst
ems;
Use
of
vacc
ines
pre
fera
ble
to r
outin
e us
e of
ant
ibio
tics
and
chem
ical
s (u
se c
hem
ical
s an
d dr
ugs
only
in e
xtre
me
case
s w
hen
sym
pto
ms
of d
isea
se a
re a
pp
aren
t);
Use
of
spec
ies
pre
sent
in n
earb
y w
ater
s to
avo
id im
pac
ts o
nbi
odiv
ersi
ty.
Util
izat
ion
of h
atch
ery-
pro
duce
d se
ed f
or s
tock
ing;
Use
of
barr
en a
reas
bor
derin
g m
angr
oves
usi
ng p
ump
ing
and
not
tides
to
fill p
onds
, se
par
atio
n of
pon
d fa
rms
to a
void
cre
atio
nof
bar
riers
beh
ind
man
grov
es;
Avoi
d p
ond
cons
truc
tion
in c
oast
al a
reas
clo
se t
o ag
ricul
tura
lfie
lds
or f
resh
wat
er w
ells
. U
se o
f lin
ers
to a
void
wat
er p
erco
latio
nin
pro
xim
ity o
f ag
ricul
tura
l fie
ld a
nd f
resh
wat
er w
ells
whe
revi
able
;
Car
ry o
ut s
tudi
es o
n p
oten
tial i
mp
act
on e
xist
ing
faun
a p
rior
toin
trod
ucin
g a
new
sp
ecie
s in
an
open
wat
er b
ody.
Utm
ost
care
with
the
intr
oduc
tion
of p
reda
tor
spec
ies.
Imp
rove
reg
ulat
ions
on
intr
oduc
tions
;
Qua
rant
ine
pra
ctic
es f
or s
eed
and
intr
oduc
tions
; us
e of
hat
cher
yp
rodu
ced
cert
ified
dis
ease
-fre
e se
ed.
Imp
rove
d ed
ucat
ion
offa
rmer
s an
d im
pro
ved
regu
latio
ns o
n m
ovem
ents
of
seed
/adu
lts.
MO
NIT
OR
ING
IN
DIC
AT
OR
S
Cha
nges
in w
ater
qua
lity
with
in t
he s
yste
m a
nd in
neig
hbor
ing
wat
er b
odie
s;
Cha
nges
(de
grad
atio
n) in
bot
tom
fau
na a
nd f
lora
in t
he c
ase
of f
loat
ing
cage
s;
Cas
es o
f fis
h di
seas
e w
ithin
the
sys
tem
and
inne
ighb
orin
g w
ater
bod
ies;
ap
pea
ranc
e of
bac
teria
lst
rain
s re
sist
ant
to a
ntib
iotic
s;
Cha
nges
in c
omp
ositi
on o
f ca
tche
s in
sur
roun
ding
wat
ers.
Mon
itorin
g of
see
d co
llect
ors
oper
atio
n, c
hang
es in
spec
ies
abun
danc
e an
d co
mp
ositi
on in
cat
ches
of
fishe
rmen
;
Test
ing
of s
oils
for
pot
entia
l aci
dity
prio
r to
pon
dco
nstr
uctio
n;
Mea
sura
ble
incr
ease
in s
alin
ity in
wat
er e
xtra
cted
from
coa
stal
wel
ls n
ear
aqua
cultu
re f
arm
s;
Dis
pla
cem
ent
or e
limin
atio
n of
loca
l fis
h sp
ecie
s;
Occ
urre
nce
of e
pid
emic
s or
not
icea
ble
pre
senc
e of
dise
ase
in f
arm
s or
sur
roun
ding
wat
er b
odie
s.
TAB
LE 7
- A
qua
cult
ure:
Pra
ctic
es a
ssoc
iate
d w
ith
en
viro
nm
enta
l ris
k. P
ossi
ble
ad
vers
e im
pac
ts, m
itig
atio
n m
easu
res
and
ind
icat
ors
for
mon
itor
ing
.
Inte
nsi
ve a
nd
sup
er-i
nte
nsi
ve c
ultu
re:
RuralInvest Mod.3 EN 07.qxd 21-11-2007 11:57 Page 93
94
IMPA
CT
S
Com
pac
tion
of s
oil d
urin
g co
nstr
uctio
n;
Slop
e an
d riv
erba
nk d
esta
biliz
atio
n: la
ndsl
ides
,co
llap
se o
f gu
llies
and
ste
ep s
lop
es,
side
-tip
pin
g of
spoi
l mat
eria
l;
Deg
rada
tion
of v
eget
atio
n al
ong
river
bank
s, r
oad
bed
or a
t si
tes
whe
re c
onst
ruct
ion
mat
eria
ls a
redr
awn;
Hyd
rolo
gica
l cha
nges
(e.
g. in
crea
sed
runo
ff an
dflo
odin
g, w
ater
flow
div
ersi
on,
chan
nel
mod
ifica
tion)
;
Eros
ion
due
to t
he a
bove
rea
sons
;
Clo
ggin
g of
dra
inag
e w
orks
, cr
eatio
n of
sta
gnan
tw
ater
poo
ls;
Silta
tion,
sed
imen
tatio
n an
d de
grad
atio
n of
w
ater
bodi
es;
Cha
nges
in g
roun
dwat
er t
able
leve
ls;
Con
tam
inat
ion
and
heal
th r
isks
fro
m o
il an
dha
zard
ous
was
te;
Dus
t an
d no
ise
durin
g
Acc
ess
to p
revi
ous
ly is
ola
ted
are
as:
Rest
rictio
n of
bio
logi
cal c
orrid
ors,
bar
riers
to
the
free
mov
emen
t of
wild
life;
Dis
rup
tion
or d
estr
uctio
n of
wild
life,
roa
d ki
lls;
Loss
, fr
agm
enta
tion
and
dist
urba
nce
of n
atur
alha
bita
ts (
incl
. aq
uatic
);
Dis
turb
ance
of
pro
tect
ed a
reas
, th
reat
s fo
ren
dang
ered
sp
ecie
s;
Incr
ease
in f
ores
t fir
es c
ause
d by
incr
ease
d hu
man
activ
ity;
Illeg
al h
untin
g, s
ee T
able
5;
MIT
IGA
TIO
N M
EASU
RES
Car
eful
rou
te a
nd s
ite s
elec
tion
avoi
ding
ste
ep s
lop
es a
nd r
iver
sw
ith lo
w f
low
, m
inim
izin
g cu
ttin
g of
tre
es,
min
imiz
ing
num
ber
ofw
ater
cro
ssin
gs a
nd d
isru
ptio
n in
wat
erflo
ws;
Car
eful
des
ign
to m
inim
ize
imp
acts
of
wat
er c
ross
ings
, to
bal
ance
fillin
g an
d cu
ttin
g, a
nd t
o av
oid
crea
tion
of s
teep
cut
slo
pes
;
Buffe
r zo
nes
betw
een
road
and
wat
er b
odie
s;
Con
stru
ctio
n in
dry
sea
son;
Ensu
re u
se o
f p
rop
er a
nd a
pp
rop
riate
con
stru
ctio
n st
anda
rds
(incl
. p
rote
ctio
n of
soi
ls d
urin
g co
nstr
uctio
n, c
onst
ruct
ion
site
clea
n-up
and
reh
abili
tatio
n);
Prop
er d
rain
age
and
infil
trat
ion
ditc
hes;
Stab
iliza
tion
of v
ulne
rabl
e su
rfac
es:
terr
aced
slo
pes
, re
tain
ing
wal
ls/p
onds
, b
arrie
rs,
ripra
p,
grid
wor
k, c
rib w
alls
etc
.;
Rep
lant
ing
(with
nat
ive
spec
ies)
ear
ly in
the
con
stru
ctio
n p
roce
ss;
Prop
er d
isp
osal
of
oil a
nd h
azar
dous
mat
eria
ls;
Dus
t co
ntro
l by
wat
er a
nd o
ther
mea
ns.
Car
eful
rou
te a
nd s
ite s
elec
tion
to a
void
imp
orta
nt h
abita
ts,
sens
itive
or
pro
tect
ed a
reas
;
Con
serv
atio
n of
nat
ural
cor
ridor
s;
Cre
atio
n of
ani
mal
cro
ssin
gs u
nder
and
ove
r ro
ads,
fen
cing
;
No
cons
truc
tion
durin
g br
eedi
ng s
easo
n;
Awar
enes
s-ra
isin
g an
d tr
aini
ng a
mon
g ru
ral c
omm
uniti
es o
nsu
stai
nabl
e us
e of
for
este
d ar
eas
and
thei
r re
sour
ces;
Vigi
lanc
e an
d m
onito
ring
by b
oth
loca
l com
mun
ities
and
pol
ice
and
wild
life
auth
oriti
es;
Esta
blis
hmen
t an
d m
aint
enan
ce o
f fir
ebre
aks;
MO
NIT
OR
ING
IN
DIC
AT
OR
S
Cha
nge
in a
rea
of d
enud
ed s
lop
es/l
engt
h of
exp
osed
riv
erba
nks;
Num
ber
of la
ndsl
ide
case
s af
fect
ing
traf
fic;
Cha
nge
in t
he h
eigh
t of
roo
t p
edes
tals
;
Acc
umul
atio
n of
silt
/san
d at
the
foo
t of
bus
hes,
pos
ts a
nd f
ence
s;
Dep
th o
f ril
ls/g
ullie
s;
Cha
nges
in y
ield
s in
nei
ghbo
ring
field
s;
Flow
and
sed
imen
t lo
ads
in s
trea
ms
if da
taav
aila
ble
from
a n
earb
y hy
drol
ogic
al s
tatio
n;
Visi
ble
chan
ges
in w
ater
qua
lity
in n
eigh
borin
gw
ater
bod
ies;
Cha
nges
in w
ater
tab
le le
vels
in w
ells
;
Cha
nges
in f
ish
catc
hes
from
the
affe
cted
wat
erbo
dy;
Cha
nges
in le
vels
of
wat
er-r
elat
ed d
isea
ses.
Cha
nges
in o
ccur
renc
e of
wild
ani
mal
s;
Cha
nges
in h
untin
g/fis
h ca
tche
s;
Rate
s of
ext
ract
ion
of t
imbe
r an
d no
n-tim
ber
fore
stp
rodu
cts;
Cas
es o
f ill
egal
logg
ing/
land
con
vers
ion.
TAB
LE 8
- S
mal
l rur
al a
cces
s ro
ads
and
bri
dg
es: P
ract
ices
ass
ocia
ted
wit
h e
nvi
ron
men
tal r
isk.
Pos
sib
le a
dve
rse
imp
acts
, mit
igat
ion
mea
sure
s an
d in
dic
ator
s
for
mon
itor
ing
.
Imp
act
on
so
il an
d w
ater
bo
die
s:
RuralInvest Mod.3 EN 07.qxd 21-11-2007 11:57 Page 94
95
IMPA
CT
S
Def
ores
tatio
n an
d lo
ss o
f bi
odiv
ersi
ty f
rom
incr
ease
d lo
ggin
g, t
ouris
m,
and
conv
ersi
on o
ffo
rest
are
as in
to p
astu
re o
r fa
rmla
nd.
Soci
al im
pac
ts:
Loss
of
build
ings
, p
rop
erty
, o
r ec
onom
icliv
elih
ood;
Imp
act
on h
uman
hea
lth f
rom
tra
ffic
acci
dent
s an
dtr
ansm
issi
on o
f di
seas
es a
long
roa
ds;
Deg
rada
tion
of h
isto
rical
/cul
tura
l site
s;
Soci
al c
hang
es f
rom
new
roa
ds t
o is
olat
edco
mm
uniti
es;
Imp
acts
on
indi
geno
us p
eop
le.
MIT
IGA
TIO
N M
EASU
RES
Elim
inat
ion
of f
lam
mab
le m
ater
ials
in c
onst
ruct
ion;
Educ
atio
nal p
rogr
ams
to r
educ
e th
e in
cide
nce
of f
ires;
Esta
blis
hmen
t of
pro
tect
ed a
reas
.
Car
eful
rou
te s
elec
tion
avoi
ding
eco
nom
ic lo
sses
, in
dige
nous
peo
ple
s la
nds,
cul
tura
l site
s, e
tc.;
Safe
ty d
esig
ns:
regu
latio
n, s
ignp
ostin
g, v
isib
ility
, sp
eed
limits
,et
c.;
Spec
ial m
easu
res
to p
rote
ct c
ultu
ral s
ites.
MO
NIT
OR
ING
IN
DIC
AT
OR
S
Traf
fic a
ccid
ents
;
Dis
ease
cas
es.
Acc
ess
to p
revi
ous
ly is
ola
ted
are
as:
RuralInvest Mod.3 EN 07.qxd 21-11-2007 11:57 Page 95
96
IMPA
CT
S
Con
tam
inat
ion
of s
urfa
ce a
nd g
roun
dwat
er f
rom
was
tew
ater
at
site
or
dow
nstr
eam
;
Low
erin
g of
wat
er t
able
due
to
over
exp
loita
tion;
Cre
atio
n of
sta
gnan
t w
ater
poo
ls;
Unp
leas
ant
odor
s;
Deg
rada
tion
of s
oil c
over
and
veg
etat
ion;
Dis
turb
ance
of
natu
ral h
abita
ts a
nd w
ildlif
e;
Incr
ease
in w
ater
born
e di
seas
es.
Solid
was
te c
olle
ctio
n/d
isp
osa
l:
Pollu
tion
of s
urfa
ce a
nd g
roun
dwat
er f
rom
land
fill;
Smog
, ha
ze a
nd p
artic
ulat
e co
ntam
inat
ion
from
burn
ing
garb
age
(incl
. im
pac
t on
hum
an h
ealth
);
Unp
leas
ant
odor
s;
Con
tam
inat
ion
and
heal
th r
isks
fro
m h
azar
dous
was
te;
Dis
ease
tra
nsm
issi
on;
Unp
leas
ant
livin
g co
nditi
ons
clos
e to
site
.
Co
nst
ruct
ion
of
bui
ldin
gs
(hea
lth
cen
ters
etc
.):
Wat
er a
nd s
oil c
onta
min
atio
n fr
om b
uild
ing
was
te;
Deg
rada
tion
of v
eget
atio
n at
site
and
alo
ngtr
ansp
ort
rout
es;
MIT
IGA
TIO
N M
EASU
RES
Sitin
g st
udie
s to
avo
id s
ensi
tive
site
s;
Con
sulta
tion
and
par
ticip
atio
n of
all
affe
cted
com
mun
ities
;Re
gion
al w
ater
use
pla
nnin
g;
Min
imal
dis
tanc
e fr
om h
uman
set
tlem
ents
and
fie
lds;
Prop
er d
rain
age;
Was
tew
ater
tre
atm
ent
syst
ems:
set
tling
pon
ds,
scre
ens,
aer
atio
nsy
stem
s, c
onne
ctio
n to
larg
er s
ewag
e sy
stem
s;
Odo
r-co
ntro
l tec
hnol
ogy;
Soil
and
vege
tatio
n p
rote
ctio
n du
ring
cons
truc
tion,
sta
biliz
atio
n(e
.g.
re-v
eget
atio
n);
Op
erat
ion
and
mai
nten
ance
pla
ns a
nd t
rain
ing;
Prot
ectio
n fr
om li
vest
ock;
Wat
er q
ualit
y te
sts;
Hyg
iene
tra
inin
g.
Sitin
g st
udie
s (c
over
ing
also
tra
nsp
ort
need
s);
Prop
er d
esig
n of
col
lect
ion
and
disp
osal
sys
tem
s;
Prop
er d
rain
age;
Spre
ad a
nd c
over
gar
bage
at
land
fill s
ite,
pro
hibi
t or
min
imiz
ebu
rnin
g;
Sep
arat
e di
spos
al s
yste
m f
or m
edic
al o
r ha
zard
ous
was
te;
Op
erat
ion
and
mai
nten
ance
pla
ns a
nd t
rain
ing;
Recy
clin
g p
rogr
ams;
Safe
ty p
roce
dure
s an
d tr
aini
ng.
Prop
er s
iting
and
sel
ectio
n of
tra
nsp
ort
rout
es;
Prot
ectio
n of
soi
l sur
face
s an
d ve
geta
tion
durin
g co
nstr
uctio
n;
Dus
t co
ntro
l by
wat
er o
r ot
her
mea
ns;
MO
NIT
OR
ING
IN
DIC
AT
OR
S
Cha
nges
in w
ater
tab
le le
vels
in w
ells
;
Wat
er q
ualit
y in
wel
ls (
if m
easu
rem
ents
per
form
ed);
Visi
ble
chan
ges
in w
ater
qua
lity
in r
ecei
ving
w
ater
bodi
es;
Size
of
area
of
degr
aded
veg
etat
ion
at s
ite;
Num
ber
of o
per
atio
n an
d m
aint
enan
ce p
lans
and
regi
onal
wat
er u
se p
lans
;
Dis
ease
cas
es.
Wat
er q
ualit
y in
wel
ls (
if m
easu
rem
ents
per
form
ed);
Visi
ble
chan
ges
in w
ater
qua
lity
in r
ecei
ving
w
ater
bodi
es;
Num
ber
of o
per
atio
n an
d m
aint
enan
ce p
lans
;
Illeg
al la
ndfil
ls;
Cas
es o
f ga
rbag
e bu
rnin
g;
Dis
ease
cas
es.
Wat
er q
ualit
y in
wel
ls (
if m
easu
rem
ents
per
form
ed);
Visi
ble
chan
ges
in w
ater
qua
lity
in r
ecei
ving
w
ater
bodi
es;
TAB
LE 9
- S
mal
l soc
ial i
nfr
astr
uctu
re in
vest
men
ts: P
ract
ices
ass
ocia
ted
wit
h e
nvi
ron
men
tal r
isk.
Pos
sib
le a
dve
rse
imp
acts
, mit
igat
ion
mea
sure
s an
d in
dic
ator
s fo
r m
onit
orin
g.
Wat
er s
upp
ly a
nd
san
itat
ion
:
RuralInvest Mod.3 EN 07.qxd 21-11-2007 11:57 Page 96
97
IMPA
CT
S
Wat
er c
onta
min
atio
n fr
om in
adeq
uate
san
itatio
n;
Acc
umul
atio
n an
d so
il co
ntam
inat
ion
from
sol
idw
aste
;
Con
tam
inat
ion
and
heal
th r
isks
fro
m m
edic
alw
aste
;
Con
stru
ctio
n ac
cide
nts.
Dus
t an
d no
ise
durin
g co
nstr
uctio
n;
Dis
turb
ance
of
habi
tats
and
wild
life;
MIT
IGA
TIO
N M
EASU
RES
Con
trol
and
dai
ly c
lean
ing
of c
onst
ruct
ion
site
s;
Prov
isio
n fo
r ad
equa
te w
aste
dis
pos
al a
nd s
anita
tion
durin
gco
nstr
uctio
n an
d op
erat
ion;
Sep
arat
e di
spos
al f
acili
ties
for
haza
rdou
s w
aste
;
Spec
ial a
tten
tion
to d
rain
age;
Safe
ty m
easu
res
and
pro
cedu
res.
MO
NIT
OR
ING
IN
DIC
AT
OR
S
Size
of
area
of
degr
aded
veg
etat
ion
at s
ite;
Dis
ease
and
acc
iden
t ca
ses.
Co
nst
ruct
ion
of
bui
ldin
gs
(hea
lth
cen
ters
etc
.):
RuralInvest Mod.3 EN 07.qxd 21-11-2007 11:57 Page 97
RuralInvest Mod.3 EN 07.qxd 21-11-2007 11:57 Page 98
Further information on RuralInvestor other FAO Investment Centreproducts and services can beobtained from:
DirectorInvestment Centre DivisionFood and Agriculture Organizationof the United NationsViale delle Terme di Caracalla00153 Rome, Italy
Tel: (+39) 06 57054477Fax: (+39) 06 57054657
E-mail: [email protected] site: www.fao.org/tc/tciFAO Web site: www.fao.org
RURALINVEST
In recent years, locally designed and managed investment projectshave assumed increasing importance as effective tools forsustainable rural development. Supporting local communities toconceive and implement their own projects – whether for incomegenerating activities or for social investments – not only ensuresgreater ownership and commitment to those projects, but alsostrengthens the capacity of communities to contribute to andmanage their own development. However, the increasing adoptionof this approach by national governments, international financingagencies and rural banks has also highlighted the critical importanceof providing adequate support and guidance to national techniciansworking with communities and other groups in identifyinginvestment needs, defining potential projects, and developing themfor external financing.
RuralInvest answers this need by offering a series of modules,developed over a number of years and tested extensively in the field,which provide such support through a range of materials andtraining courses, and include technical manuals, custom developedsoftware and instructors’ guides. Modules currently in use or underdevelopment include:
Module 1: Participatory Identification of Local Investment Needs
Module 2: Preparing and Using Project Profiles
Module 3: Detailed Project Formulation and Analysis
Module 4: Monitoring and Evaluation of RuralInvest Projects
An associated training course "Assessing Demand for RuralInvestments" is also available to assist technicians to evaluatemarket and non-market demand for project outputs.
Module 3: Detailed Project Formulation and Analysis
Following on from earlier needs identification and project definitionactivities, Module 3 provides guidelines to assist local technical staffin developing high quality project proposals suitable for externalappraisal and subsequent monitoring and evaluation. Drawing onMS Windows-compatible software which can be extensivelycustomised to meet user needs, the Module facilitates thepresentation of essential project data and automates key calculationssuch as cash flow, working capital requirements, rates of return,employment generation and costs per beneficiary. The Modulecomprises this technical manual, software with a user’s guide, andtraining materials with an associated instructor’s guide.
MODULE 3
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MODULE 3
DETAILED PROJECTFORMULATIONAND ANALYSIS
R U R A L I N V E S T
A participatory approach to identifying andpreparing small scale rural investments
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