Development planning and project Analysis-II

1. Development Planning and Project Analysis-II By: Haile G.(Msc.) Jimma University,2017

2. The project concept project defined: • A project is an endeavor(effort) to accomplish a specific objective through a unique set of interrelated tasks and the effective utilization of resources. • A project can alternatively be defined as a group of tasks performed in a definable time period in order to meet a specific set of objectives.

3. Basic(common) characteristics of project-1 1. A project has a well-defined objective- an expected result or product( usually measurable). 2. A Project is Composed of a series of interdependent tasks(set of activities): 3. A project Utilizes various resources:–uses multiple/diverse resources(human force, material, money and time). 4. A project Has a specific time frame: - a starting and finishing time in which the objective must be accomplished

4. Basic characteristics of project-2 5. A project may be a unique or one-time endeavor:–such as developing a new product(non routine nature of the activities) 6. A project Involves a degree of uncertaintybased on certain assumptions and estimates the project budget, schedule, and work scope.

5. Some Examples of Projects • Planning a wedding • Construction of the house • Designing and implementing a computer system • Setting up a cement plant • Designing and producing a brochure • Executing an environmental clean-up of a contaminated site • construction of highway • Performing a series of surgeries on an accident victim

6. Organic Link between Policy, Development Plan and Projects-1 • the policy framework defines the context for periodic development plans (short-, medium- and long-terms plans) which then require specific instruments for implementation. • Projects are the policy and plan instruments, a particular decision scheme meant to convert policies and plans into reality. • So we have this generic scheme: Policy ⇒ Development Plans ⇒ Programs ⇒ Projects ⇒ Outcomes / impacts / changes.

7. Organic Link between Policy, Development Plan and Projects-2 • Promoting projects without having development policies and plans will lead to scattered/dispersed and unorganized development endeavors. • Policies and plans without projects mean non-implementation, paper tiger decision makers, having policy and plan documents for other purposes. • Projects are the cutting edges of development plans. • Development Endeavour without projects is unperceivable.

8. The linkage between projects and programs-1 • Projects are the concrete manifestations of the development plans and programs in a specific place and time. • One can think of projects as subunits and bricks of programs, which constitute a component of or the entire national plan. • A project refers to an investment activity where resources are used to create capital assets, which produce benefits over time and has a beginning and an end with specific objectives • A program is an ongoing development effort or plan involving a number of projects. • Programs may or may not necessarily be time bounded. • Yet programs cannot live forever, they have limited life cycle, which however, may or may not be explicitly stated.

9. The linkage between projects and programs-2 • So in effect in terms of time delimitation, there is only relative difference between programs and projects. • National development plans are further disaggregated into a set of sectoral plans which involve a number of programs and projects.

10. The linkage between projects and programs-3 • A development plan or a program is therefore a wider concept than a project. • It may include one or several projects at various times whose specific objectives are linked to the achievement of higher level of common objectives. • Note projects can stand alone without being part of certain program. • So one can visualize the possibility of: policies → development plans → projects. • Projects, which are not linked with others to form a program, are sometimes referred to as “stand alone” projects.

11. The linkage between projects and programs-4 • Program study that incorporates a multiple of projects requires three steps: • The analyst must appraise each project independently. • The analyst must appraise each possible combination of projects. • The analyst must appraise the entire program, including all the projects, as a package.

12. The linkage between projects and programs-5 Example of programs: road development program, health improvement program, nutritional improvement program, rural electrification program, institutional reform program, management system reform program, etc. • A health improvement program may include a water project as well as a construction of health centers both aimed at improving the health of a given community, which previously lacked easy access to these essential facilities. • Note:- In turn each program involves different components (sub programs) which in turn involves different projects.

13. The linkage between projects and programs-6 • Example for subprogram:- Health program that may include: • Preventive health care sub program; • Treatment based health sub program; In each sub programs one can identify further sub sub programs. For instance in the preventive sub program, one may include: • Potable water expansion sub sub program • Waste treatment sub program • Awareness creation sub program • HIV /AIDs prevention sub program

14. The Project Life Cycle/phases • A project cycle is a sequence of events, which a project follows. • Projects are “born” when a need is identified by the customer. • Project life cycles vary in length, from a few weeks to several years. 1st phase: Identification of problem or opportunity (Opportunity study) - Project ideas can emanate from a variety of sources. • Much depends on the experience, and even the imagination, of those entrusted with the task of initiating project ideas. • In general, one can distinguish two levels where project ideas are born: The macro level and the micro level.

15. Identification(Opportunity study)-1 1. macro level : • National policies, strategies and priorities • National, sectoral, sub-sectoral or regional plans and strategies supplemented by special studies, sometimes called opportunity studies, conducted with the aim of translating national and sectoral, sub-sectoral and regional programs into specific projects • General surveys, resource potential surveys, regional studies, master plans, statistical publications which indicate directly or indirectly investment opportunities

16. macro level IV. Constraints on the development process due to shortage of essential infrastructure facilities, problems in the balance of payments, etc. V. Government decisions to correct social and regional inequalities or to satisfy basic needs of the people through the developments of projects VI. A possible external threat that necessitates projects aiming at achieving, for example, self sufficiency in basic materials, energy, transportation, etc VII.Unusual events such as draughts, floods, earth-quake, hostilities, etc.

17. Micro level source of Project Idea • identification of unsatisfied demand or needs. • The existence of unused or underutilized natural or human resources and the perception of opportunities for their efficient use • need to remove shortages in essential material services, or facilities that constrain development efforts • initiative of private or public enterprises in response to incentives provided by the government. • necessity to complement or expand investments previously undertaken, and desire of local groups or organizations to enhance their economic status and improve their welfare

18. 2nd Phase: Project preparation….1 • Project preparation must cover the full range of technical, institutional, economic, and financial conditions necessary to achieve the project’s objective. • Preparation of project involves generally four steps: • Pre-feasibility studies • Feasibility studies • Support studies • Appraisal of studies

19. Pre-feasibility Study (Pre-selection/ Preliminary Screening )------1 • Once a project proposal is identified, it needs to be examined. • the first step is to select one or more of them as potentially promising. • this exercise is meant to assess whether the project is clearly worthwhile to justify a feasibility study and what aspects of the project are critical to its viability and hence warrant an in –depth investigation.

20. Pre-feasibility Study (Pre-selection/ Preliminary Screening ) -----2 • At this stage, the screening criteria are rough and vague, becoming specific and refined as project planning advances. • the analyst should eliminate project proposals that are technically unsound and risky, have no market for their output, have inadequate supply of inputs, are very costly in relation to benefits, assume over ambitious sales and profitability, etc. • Compatibility with the promoter, Consistency with government priorities, Availability of inputs, Adequacy of market, Reasonableness of cost, and Acceptability of risk level should be looked.

21. Pre-feasibility Study (Pre-selection/ Preliminary Screening ) -------3 • As a result of the preliminary screening exercise, a project profile, an opportunity study report, or an identification study report, as appropriate, is prepared showing which project alternatives should be rejected and which ones may be advanced to the next stage.

22. Feasibility Study • The major difference between pre-feasibility and feasibility studies is the amount of work required in order to determine whether a project is likely to be viable(able to be done) or not. • If the preliminary screening suggests that the project is clearly worthwhile(valuable), a detailed analysis of the marketing, technical, financial, economic, and ecological aspects is undertaken. • Feasibility study provides a comprehensive review of all aspects of the project and lays the foundation for implementing the project and evaluating it when completed.

23. Feasibility Study-----1 • The focus of this phase is on gathering, preparing, and summarizing relevant information about various project aspects, which are being considered for inclusion in the capital investment. • Based on the information developed in this analysis, the stream of costs and benefits associated with the project can be defined. • At this stage a team of specialists (Scientists, engineers, economists, sociologists) will need to work together.

24. Feasibility Study-----2 • At this stage more accurate data need to be obtained and if the project is viable it should proceed to the project design stage. • The final product of this stage is a feasibility report. • The feasibility report should contain the following elements: • Market analysis • Technical analysis (materials & Inputs, Technology and engineering works, construction, infrastructure) • Organizational analysis • Financial analysis • Economic analysis • Social analysis and • Environmental analysis.

25. Support Studies-----1 • Support or functional studies cover specific aspects of an investment project, and are required as pre requisites for, or in support of, pre-feasibility and feasibility studies of particularly large-scale investment proposals, the viability of which critically depends upon the quantity and quality of certain input or aspect of that project. • This type of study is justified when a detailed study required for a specific aspect/input/ is too involved to be undertaken as part of the feasibility study.

26. Support Studies….2 • the decision towards undertaking a feasibility study could be dependent upon the outcome of a support study. Example: Cement processing is tied to the source of major raw materials, which are lime stone and sandstone. • Since the requirement is bulky, one cannot think of a cement factory located at a distance from the source of these raw materials. • So there is little room for outsourcing from distant locations or imports. • Since cement production is critically dependent upon the availability of adequate quantity and the right quality of these raw materials, a support study is justified before commissioning a full-fledged feasibility study.

27. Appraisal(assessment of value) of an investment Decision • project appraisal can be defined as a second look at the project report by a team of professionals, who were not participated in the preparation of the study but qualified and experienced to evaluate such studies. • It is or should be an independent assessment of the project to identify the weaknesses and strengths of the study that have a bearing on the decision to invest, and/or to finance the project.

28. Appraisal of an investment Decision-----1 • Appraisal is the comprehensive and systematic assessment of all aspects of a project study, addressing particularly issues like: • Specificity of objectives; • Clarity of problems; • Methodology: type and source and appropriateness of data collection techniques and analysis techniques; • Project specific factors.

29. Appraisal of an investment Decision-----2 • A wide range of appraisal criteria have been developed to judge the worthwhile of a project. • They are divided into two broad categories, viz. non-discounting criteria and discounting criteria. • The principal non-discounting criteria are the payback period and the accounting rate of return. • The key discounting criteria are the net present value, the internal rate of return, and the benefit cost ratio.

30. Appraisal of an investment Decision------3 • When the appraisal is completed, the findings and final recommendations are put together in the form of an appraisal report. • The recommendation may be to approve, re-formulate, postpone, or abandon the project under review.

31. 3rd stage: Selection of projects(investment alternatives) • The feasibility study would enable the project analyst to select the most likely project out of several alternative projects. • It addresses the question – “is the project worthwhile”? • Which of the projects is the best option from the existing competing once? Given that there are alternative projects, theoretically the owner is supposed to come up with alternative use of his/her money and hence the need to choose the best investment opportunity.

32. 3rd stage: Selection of projects(investment alternatives)--1 • Project selection involves political, social and economic variables. • Essentially it is a political process in the sense that despite economic rationality, political forces could exert significant pressure on the decision-making process on the selection of projects from available alternatives.

33. 3rd stage: Selection of projects(investment alternatives)---2 • project appraisal study could be categorized in the selection criterion. • After appraisal studies the decision maker will have to select one or a number of projects on the bases of pre established evaluation/selection criteria.

34. 4th stage: Implementation(Investment phase)-i • After the project design is prepared negotiations with the funding organization starts and once source of finance is secured implementation follows. • The better and more realistic the project plan is the more likely it is that the plan can be carried out and the expected benefits realized.

35. 4th stage: Implementation(Investment phase)-ii • Project implementation must be flexible since circumstances change frequently. • Technical changes are almost inevitable as the project progresses; price changes may necessitate adjustments to input and output prices; political environment may change. • Translating an investment proposal into a concrete operational unit is a complex, time consuming and risk fraught task.

36. 4th stage: Implementation(Investment phase)-iii • Delays in implementation, which are common, can lead to substantial cost overrun. • For expeditious (efficient) implementation at a reasonable cost, the following are helpful: • Adequate formulation of projects:-if necessary, homework in terms of preliminary studies and comprehensive and detailed formulation of projects is not done, many surprises and shocks are likely to spring on the way.

37. 4th stage: Implementation(Investment phase)-iv II. Use of the principle of responsibility accounting: Assigning specific responsibilities to project managers for completing the project within the defined time frame and cost limits is helpful in expeditious execution and cost control. III.Develop project management competence: Use of network techniques[e.g. PERT (program evaluation Review Technique) and CPM (Critical Path Method)] • With the help of these techniques, monitoring becomes easier.

38. 5th stage: operational phase-i • Project operation involves the running and maintenance of new entity in accordance with set objectives and planned tasks. • The problems of the operational phase need to be considered from both a short-and long-term viewpoint. • The short-term view relates to the initial period after commencement of production when a number of problems may arise concerning such matters as the application of production techniques, operation of equipment or inadequate labor productivity owing to a lack of qualified staff.

39. 5th stage: operational phase-ii • The long-term view relates to chosen strategies and the associated production and marketing costs as well as sales revenues. • These have a direct relationship with the projections made at the pre-investment phase. • If such strategies and projections are proved faulty , remedial measures will not only be difficult but may prove to be highly expensive.

40. 5th stage: operational phase-iii • The operational phase involves the following main functions: 1. Commissioning and starting of commercial production; 2. Post-project evaluation 3. Replacement/rehabilitation 4. Expansion /innovation.

41. 6th stage: Evaluation • The final phase of the project is the evaluation phase. • The project analyst looks carefully at the successes and failures in the project experience to learn how better to plan for the future. • In this stage it is important to examine the project plan and what really happened. • Performance review should be done periodically to compare actual performance with projected performance.

42. Importance of project evaluation • It throws light on how realistic were the assumptions underlying the project • it provides a documented log of experience that is highly valuable in future decision making; • it suggests corrective action to be taken in the light of actual performance; • it helps in uncovering judgment biases; • it induces a desired caution among project sponsors. • Weakness and strengths should carefully be noted so as to serve as important lessons for future project analysis undertaking.

43. Evaluation • Evaluation is not limited only to completed projects. • Ongoing projects could also be evaluated to rectify problems when the project is in trouble. • The evaluation may be done by the project management, the sponsoring agency, or other bodies.

44. The end of chapter 1 Thank you for your attention

45. CHAPTER 2:FINANCIAL ANALYSIS OF PROJECT • Financial analysis is all about the assessment, analysis and evaluation of the required project inputs, the outputs to be produced/generated/ and the future net benefits, (expressed in financial terms) with the aim of determining the viability of a project to the private or the executing entity (investor or public body). • It is concerned with assessing the feasibility of a new project from the point of view of its financial results.

46. financial analysis of project-i • It will be worthwhile to carry out a financial analysis if the output of the project can be sold in the market or can be valued using market prices. • The project’s direct benefits and costs are, therefore, calculated in pecuniary terms at the prevailing (expected) market prices. • This analysis is applied to appraise the soundness and acceptability of a single project as well as to rank projects on the basis of their profitability.

47. financial analysis of project-ii • The aim of financial analysis is to: 1. understand the entity's operations by reviewing its physical and money flows; 2. assess the entity's financial balance, and thus the viability(capable of being done) of its operations; 3. assess the entity's efficiency and estimate the likely financial return on investment

48. financial analysis of project-iii • The financial analysis deals with two issues:

49. financial analysis of project-iv • The two types of analysis are complementary and not substitutable.

50. Identification and Analysis of the Estimates of Costs and Benefits • In project analysis, the identification of costs and benefits is the first step. • This involves the specification of the costs and benefits variables for which data should be collected, identification of the sources of information, collection of the same and then assessment of the quality and reliability of the collected information.