Project Identification

Project Identification

  Project identification amounts to finding projects which can contribute towards achieving specified development objectives.

  Project ideas should in general aim at overcoming constraints to the development effort. These constraints can be:-

. material . human or institution

. meeting unsatisfied needs and demand for goods and services . foreign exchange constraints that might necessitate projects for import substitution or export promotion Project ideas arise from identification of a number of different factors. a) At the micro-level project ideas emanate from:-

The identification of unsatisfied demands or needs;

The existence of unused or underutilized resources;

The need to remove shortages in essential materials, services or facilities that constrain the development effort;

The initiative of private or public enterprise in response to incentives provided by the

government; The necessity to complement or expand

investments previously undertaken;

The desire of local groups or organizations to enhance their economic status and improve

their welfare;b) At the macro-level project ideas emerge from:-  National, sectoral, or regional development plans strategies; Constraints in the development process due to shortages of essential infrastructural facilities, problem in the balance of payments, etc.

Unusual events such as droughts, flood, earthquakes, hostilities, etc; Project proposal could also originate from foreign firms; Individual inspiration, institutions, workshops development experiences of other countries; Project ideas can also originate from multilateral or bilateral development

agencies; To correct social and regional inequalities.

Christian Children’s Fund (CCF) Supported Projects

  CCF supported projects, as a policy of the

organization, must focus on the alleviation of the poorest of the poor people and mainly designed to overcome problems related to:-

health and nutrition;early childhood development and education;

adult education and vocational skills acquisition;provision of credit for small-scale non-farm income generating productive

economic activities;small-scale agricultural development

programmes;environmental protection and community water supply;

Methods Of Project Identification

There are five major methods of project identification:

1.Analysis Major Development Problems Listing ideas in a random way,  Place the problems by priority order, Select one problem as the basis for action, 

2.Analyzing National Development Objectives   Policies are instruments designed to attain

stated objectives and projects are the tangible realization of these policies,

Projects are the end products of a process which begins with an analysis of social needs and gives rise to policies and plans to meet the needs,

Techniques illustrating linkages between objectives and projects can be shown using problem tree and objective tree analysis. 

3.Economic Analysis Statistical analysis of trade reports - on

examming the data on the flow of imports or exports.

Study of Comparative Advantage – the study of successful replicable experience of other countries.

Analysis of Linkage – examine existing economic activities (enterprises) in view of their linkage potential so that backward and forward linkages can be maximized.

4.National Resource Survey Natural resource surveys are important sources

of for identifying agricultural and mineral related development projects. 5.Socio-spatial Approach To Project

Identification Participator Approach – consultation of the community about the development needs of their area and undertake together a situation analysis of major development bottlenecks which enable to identify key projects.

Area Based Functional Analysis – this approach to project identification focuses on assembling a package of complementary projects within the context of village/commune district level development plan rather than an isolated project.

During preliminary selection the analyst should eliminate project proposals that are:- technically unsound and risky; expected to have inadequate supply of inputs; costly in relation to benefits;

 

assumed over ambitious sales and profitability; not consistent with national development

objectives; environmentally unfriendly; By the end of the identification stage we should

know:- whether further detailed work is justified, what major issue have been identified? what project alternatives have been considered?

which of them have been rejected? rough estimate of costs including specific for promising projects,

Thank You

Project Proposal Formulation

Project Proposal Formulation 

1.Analyse Major Development Problems We may work on projects without consciously relating it to the programme/objectives to which they are contributing; In analyzing major development problems we may even do something irrelevant!

 The best approach is:- . identify what the problem is and what the causes are, . talk and discuss about the problem with experts, stakeholders, beneficiaries, etc., . stimulate a range of possible solutions, . end up with common agreement on the solution(s) to be implemented, What are required? . list problems in a random way, . prioritize the problems,

- Problem analysis is where project cycle starts and ends to start again. -   Project Cycle: Problem Analysis Project Formulation Project Implementation Evaluation

(assessing effectiveness and learning lessons)2.Formulate A Project Proposal For Solving A Problem - The success of a project is directly related to its success in solving the problem it was designed to solve.

3.Project Formulation - Project formulation is a systematic and logical way of developing cost effective solutions to development problems. - You can learn about formulating a project by formulating projects! Therefore, . think! . put your thoughts on paper, . discuss with others,

. check facts and it may require re-writing several times,  4.A development project proposal will always contain the answers for the following key questions:-what is the problem?which group of people will benefit from the solution? to which development objective will the project contribute?

what is the immediate objective(s) of the project?  what will the project actually produce (output) to enable the achievement of that immediate objective(s)?  how will it produce these outputs? what activities will be undertaken? what financial, material and human resources (inputs) are needed?  what is the institutional framework?

4.1 Context and Justification -  Before starting to develop the “the technical

aspect” of a project it is useful to describe the context in which it is going to be operating and to provide valid justification for the project.

-  A concise description of the major problem to which the project tries to provide a solution will be given –its causes, its components, its symptoms.

4.2 Beneficiaries- The beneficiaries and the satisfaction of their

   needs is the major motivating element to bear in mind when preparing a project. The needs of beneficiaries must be compatible with the project’s objective.

- The geographical coverage of the project (i.e., national, regional, local) will be indicated.

- Note that terms like “target group”, “target audience” and “target population” often used instead of beneficiaries.

4.3Development Objective - In the context of formulating a development

project,development objective is used to describe a desired end, a solution to development problem.

-  In project proposals a distinction is made between development objectives and immediate objectives. 

-  The development objective is normally the higher objective one step un in the hierarchy from the project immediate objective. The immediate objective is the micro – objective and the development objective is the macro – objective.

-In the formulation of development of projects macro will normally mean country or regional level, referring to development objectives usually with long-term results and beyond one project’s scope and time - scale.

4.4 Immediate Objectives -The immediate objective will usually be a short-

term objective which contributes to the achievement of the long-term development objective. It describes the situation that will exist and the results achieved at the end of the project.

- Immediate objectives should be expressed in concrete, measurable terms, answering as factually as possible the question: what will be the situation at the end of the project? 

4.5 Outputs - Outputs are the results of project activities (i.e., services made available, infrastructure built

human resources trained, etc.) intended to achieve the immediate objective.

- Outputs are tangible and visible. 

4.6 Activities - Activities are the action taken to produce the

outputs. Activities take place overtime and are coordinated to be completed by the date required in the description of the output. They are often expressed in the form of bar or gant charts. 

4.7 Calendar - A planning calendar indicating the beginning of

each of the project’s activities, their sequencing and sequencing and duration has to be included in project documents.

4.8  Inputs -Inputs are the financial (budgets, specify if self

financed or externally financed), material (equipment,logistics) and human resources (project team, partner organization) necessary for carrying out the activities.

-These may be at various levels: international, regional, national, institutional, the ultimate beneficiaries. It is necessary to indicate who is providing the inputs.

9. Organization and Administration - The project’s: . internal organization . Relation to partners organizations have to be expressed in hierarchical and operational terms.

• The collaborations - with institutions or individuals must be clearly indicated - whether it is permanent or occasional or informal should be described.

• Indicate where the project is located: the headquarter and/or decentralized units.

• Describe the monitoring and control procedures during the project implementation.

4.8 Assumptions - Assumptions on which the project is based have

to be as realistic as possible, expected problems have to be described as well as the worse scenario if assumptions are found to be wrong. 

4.9Legal Consideration - Laws, regulations, standards in the field of

finance,labour, customs, insurance, taxes, etc. must be considered if they have any impact on the project.

Thank You

Project Preparation and Appraisal of Investment

Decisions

Appraisal of Investment Decisions in Private and Public

Sectors

• This part of project planning is concerned with methodologies that are used in selection and appraisal of investment decisions both in private and public sectors.

The need for these techniques and methodologies arises from the importance of investment in allocating productive resources over time and between different sectors, and activities in an economy.

For example, consider these questions:• Does Addis Ababa need a new airport?• Should Ethiopia build urban motorways or

improve its rural road network?• Should more investment be allocated to

expanding primary education or universities (tertiary educations)?

These are some of the typical questions that investment and project analysts are faced with.

To tackle these kinds of problems, one requires:-• The ability to choose the right investment

package/s; and • To discriminate between them on the basis of

appropriate criteria;

Private sector investment initiatives have to be assessed against the objective ofmaximizing profit or shareholders’ wealth {i.e., the value of the enterprise to owner(s)}

Public sector projects, including development

projects funded and assisted by donors and international development agencies, be appraised in terms of their net contribution to the economy and/or society as a whole.

 

The concept of investment is defined as an increase in the stock of physical assets.

In economics the notion of

(productive) investment refers to the flow of resources into the production of new capital.

• First, investment is a flow concept, that is, it is measurable over a period of time and refers to changes in the level of capital stock.

• Second, investment refers to physical assets (as distinct from financial assets).

The economic notion of investment thus takes a variety of forms, which includes the following:

• Net addition to stocks (this includes changes in inventories and work in progress as that part of current output which is not consumed).

• Plant and Machinery (the acquisition of

laths, computers, lories, etc. This includes both replacement and additions to capital stock).

• Construction ( comprising houses, offices, shops, storage, etc.)

The following are a few examples of different types of investment activities:

• Building a factory;• Extending a ware house;• Instituting a staff training programme;

• Buying ( or leasing) a new machine;• Improving a delivery service;• Launching a new product line;• Automating baggage handling, etc.

• In the world of business and finance all investments are not in the form of addition to real physical assets.

• In business and finance it involves finical transactions that diversify an enterprise’s asset portfolio (Example: purchase of shares and bonds, antiques and arts collections, foreign currencies, etc.).

Appraisal techniques are needed to help

investors or public organizations and their agents make correct decisions and select the best projects from other alternative investment schemes.

Project Pre-feasibility Study 

  Pre-feasibility analysis is carried out to screen out the promising project ideas from the not - so - promising ideas.

  Pre-feasibility analysis helps to utilize the scarce project preparation resources for more promising projects.   The difference between pre-feasibility and

feasibility analysis is one of degree rather than kind. 

Project Preparation (Feasibility Study)

  There are five important project feasibility Studies:-      Market Analysis,      Technical Feasibility,      Institutional Feasibility      Financial (Commercial

Profitability) Analysis,

Economic (National Profitability) Analysis,The content of the study vary according to the projects size and technical sophistication. Technical Feasibility Some of the general technical aspects are the following:- a)Technology Package . Has the package been well researched and field tested?

.What are the costs and benefits of alternative technological package?

. Is the machinery or equipment appropriate to the receiving situation?

b) Location  . What is the optimum area to be covered by the project in terms of resources

management, etc.? . What is the minimum catchments for schools, clinics, roads, etc.?

c) Scale of Operation . Are there significant economies of scale

production of provision of services? . At what point do diseconomies set in? d) Land Use . Does the physical layout of settlement schemes pay adequate attention to land - use? e) Recurrent Costs . Has adequate provision been made for recurrent

costs of operating the project including the maintenance?

f) Environmental Consideration . If virgin forest or jungle is to be cut down and planted up with long-gestation tree crops, has provision been made for adequate terracing, budding, and providing ground cover until the crops have canopied?  . If a dam is to be built, what are the environmental effects up-stream and down-stream of the dam? . How can bad effects be mitigated, and have the costs been included? 

. If insecticides, pesticides, etc. are to be used in large quantities in irrigation projects, what will be the effects on fishing, farming, etc.? 

Institutional Feasibility    Institutional constraints can be tackled

through good project preparation.   Salient factors of institutional

feasibility study include:-

Identification of things which can be controlled and influenced,   Sound internal organizational structure of the project, i.e., efficient - - coordination - interaction - information exchange and flow between sub-systems Competent management and supervisory

personnel,Adequate technical and skilled personnel,

    Provision of any necessary training facilities,    Effective channels of communication,    Good relationship with contributing agencies,    Realistic implementation schedules,     If policy changes are necessary for the full success of the project, whether and when they are likely to be made, 

The Time Value Of Money

Example on how to calculate the value of money.Birr 1,000 deposited in a bank at 10% interest ratecompounded annually for a period of three years.First Year-Principal at the beginning Birr1,000.0- Interest (birr1,000 x 10%) " 100.0- Principal at the end of the year " 1,100.0

Second Year- Principal at the beginning Birr1,100.0- Interest (Birr1,100x10%) “ 110.0- Principal at the end of the year “ 1,210.0 

Third Year- Principal at the beginning Birr1,210.0- Interest (Birr1,210x10%) “ 121.0 - Principal at the end of the year “ 1,331.0

Therefore, a birr1,000 today is equivalent to birr1,100,birr1,210 and birr1,331after one, two and three years time respectively, at 10% compound rate.

 

The Need For Economic Analysis Of Development Project

All the resources used in any developmentproject should make the maximumcontribution in achieving the fundamentalobjective specified in the development strategy of the country.

Economic analysis of projects is concerned with the investigation of the impact of proposed projects on the national economy. 

 It can be distinguished from financial analysis in that attention is not confined to the costs and benefits affecting a single organization. 

In financial analysis the goal is profitability to the sponsor while in economic analysis the most

important question is whether or not the project under examination is beneficial to the national

economy.

Economic analysis can be used to provide information on the impact of the project or key economic variables.  National Profitability Analysis Price Adjustment Discounting (SRD) Measures  Value Added - New Investment - Modernization (Expansion) 

Additional Indices Effect on Employment Effect on Income Distribution Effect on Net Foreign Exchange International Competitiveness Supplementary Considerations Implication on Infrastructure Implication on Technical Know-how Environmental Implication

Commercial (Financial) Feasibility Analysis  Relevant only for projects which are designed to

produce goods or services that will being charged.  Not relevant for social services projects (in

which social services considered to be “public good” and provided “free”) 

For other projects there are four ways to look at financial feasibility. These are from the point of view of:-

- direct project beneficiaries, - project as a whole,

- any financial intermediary, - government, In general, financial feasibility analysis:- -values directly quantifiable project inputs and outputs at a market prices, - government policy measure effects can either be costs or benefits, - debt services are costs, and - presents an owner’s point of view,

Project Statement a) Cash (Resource) flow statement The beginning of the financial and economic

analysis of a project is drawing up of a statement of project costs and benefits (which are investment of the project).

b) Fund Flow Statement For Liquidity Presents the sources (inflows) and application

(outflow) of funds committed.

c) Profit and Loss Statement (for profitability) - Provides the financial performance of a project during a fiscal or accounting period (a year). - It gives details of revenues to be earned, and costs to be incurred including expected gains and losses in a financial year. d) Balance Sheet for Business Worth -  Gives the status of directly productive investment undertaking. -  The common practice is to divide into: i) Asset – what a project would own,

ii) Liabilities – what a project would owe, iii) Net worth/Capital – what a project would be worth,  The Concept of Compounding - Money is the resource which has a time value.

A one Birr received now is more than one Birr received in three years time, because:-

current consumption is preferred to future consumption (psychological explanation), capital can be employed productively to

generate positive returns. An investment of one Birr today would grow to (1+r) in a year, r being the rate of return on investment (macro economic explanation).

in inflationary period a Birr today represent a greater real purchasing power than a Birr after a year.

- In general, to calculate the future value of a single flow the formula is:

F = P(1 + r)n

Where F is future value in year n, P is amount invested today, r is interest rate per period, and n is number of years of investment, - The process of discounting is simply the reverse of compounding 

F P = --------- and (1+r)n

1 ---------- is a discount factor (1 + r)n  - The discounting factor is used for the calculation of the present worth (P), if future value (F) at the end of nth period at the interest rate r.  - Different types of projects will have different profiles for the costs and benefits.    - There are four principal elements of project resources and these are:

  Investment Costs . land preparation . buildings . equipment . vehicles . etc.  Operating Costs . fixed costs . variable costs - material - power - labour

  Working Capital Costs . physical stock needed for production to be

continuous - initial stock of materials - work in progress - final stock of output  Benefits  - In resource flow net benefits are negative in the

first years while investment is taking place and utilization of the new assets is building up. Net benefits then become positive for the remaining years

Methods of Investment Profitability Analysis

 

a) Static Methods i) Simple Rate of Return Method . Simple rate of return is a ratio of net profit in

normal years to the initial investment. This rate could be calculated for both total investment and equity.

 

NP + i Ri= ---------- I Where , Ri=Simple Rate of Return NP=Net Profit i=Annual Interest Changes I=Total Investment NP Re = -------- x 100 Q 

Where Re = Simple Rate of Return Q = Equity  DECISION RULE Given "r" the market interest rate:       If Ri or Re > r, Accept r;       If Ri or Re < r, Reject r; ii) The Pay Back Period

The pay back period measures the time needed for a project to recover its investment through its netcash earnings. 

-  It is the number of years during which a projectwill accumulate sufficient cash earnings to coverthe amount of total investment. p I = ∑NPt + Dt t=0 Where I = Total investment P = Pay back period NPt = Annual net profit in year t Dt = Annual depreciation in year t (NPt + Dt) = Annual cash earning in year t

b) Dynamic Methods Dynamic measures of project performance

provide an uninterrupted view of projected project financial performance over the entire life of the project. 

 More reliable indicator than the static method.  i)Financial Net Present Value Method (FNPV) The financial net present value (FNPV) of a

project is defined as the difference between the present value of its future cash inflow and outflow.

This means that all annual cash flow should bediscounted to zero point of time (i.e., the start ofthe implementation) at a predetermined discount rate. FNPV is expressed as: FNPV= NCFO+(NCF1xa1)+(NCF2Xa2)+…+(NCFnxan) Where , FNPV=Financial net present value of a

project, NCE=Net cash flow of a project in year

0,1,2,…,n a=Discount factor in years 1,2,…,n corresponding to the selected rate of discount.

The same expression could be presented in a more aggregated way in the following formula: 

FNPV = ∑ (CIt - COt)at 

Where CIt = cash inflow in year t,

COt = cash outflow in year t,

at = discount factor,

- When alternative projects of different magnitudes of investment are compared it becomes important to relate the absolute amount of the project net benefits to its total investment.

- In such instances, divide the net present value by the discounted value of total investment. NPV NPVR = -------- P(I) Where NPVR = Net present value ratio, and P(I) = Present value of total investment,  - This ratio shows how much of the project's net present value is generated by a unit of total investment. 

- Among alternative projects, the one with the highest ratio can be selected for implementation.  ii)The Internal Rate Of Return Method(IRR)  By definition the Internal Rate Of Return

(IRR) is a rate of discount that reduces the net present value of a project zero.  

0 = ∑(CI - CO)tat 

  Unlike the NPV method the discount rate is unknown.

  When applying the IRR, one starts with an assumption that NPV=0 and try to find out the discount rate that will make the present value of cash inflows of a project equal to the present value of cash outflow.

Methods of Calculating IRR Trial and Error Method Interpolation - Arithmetic Method -  The arithmetic rule for interpolation implies

using two discount rates, one which gives a positive NPV close to zero and the other

which gives negative NPV,close to zero. PV(i2 - i1) ir = i1 + ------------ PV + /NV/ Where Ir= IRR of a project, PV=positive value of NPV at the lower d. rate, /NV/=negative value of NPV at the higher d. rate in absolute terms. i1=lower discount rate at which NPV is still positive but close to zero. i2=higher rate of discount at which NPV is already negative but close to zero.

Thank You