Department of Economics

Development
Planning &
Project Analysis II

CHAPTER I: BASIC
CONCEPTS

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Content of The Presentation
Introduction

Basic The Project

Concepts concept

The project Cycle

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 1.1. Introduction
Project planning had always been used as a means of
checking the profitability of a particular investment by
private firms.
However, recent experiences show that project analysis has
attracted the attention of development economists
• and are gauging from the total economy viewpoint in addition to
firm’s perspective.
Unless projects are cautiously prepared in substantial
details, wasteful expenditure is almost sure to result a
tragic loss in nations short of capital. This is due to
• a wrong capital investment decision often cannot be reversed
without incurring substantial loss.
Therefore, before projects are being implemented, they
have to be properly assessed both from the owner’s as well
as the total economy’s point of view. 3
 1.1. Introduction
After studying this unit, you will be
able to,
• Define the term project
• Explain the characteristic features of a project.
• Differentiate the terms development plans,
programs and projects
• Know the project cycle or phases
• Explain the different aspects of project analysis
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 1.2. The Concept(cont…)
What is project?
• It is a unique set of coordinated activities, with definite
starting and finishing points, undertaking by an
individual or organization to meet specific objectives
within defined schedule, cost and performance
parameters.
• It is an investment activity in which financial and
physical, human resources are expended to create
capital assets that produce benefits over an extended
period of time.
• It is also a complex set of activities where resources
are used in expectation of future return and which
lends itself to planning, financing and implementing as
a unit. 5
1.2. The Concept(cont…)
Characteristics of a project
1) It involves the investment of scarce resources in the
expectation of future benefits;
2) It is SMART:
• S – Specific: It has specific benefits and beneficiaries or client
groups, which needs to be specifically spelt out during project
planning studies
• M – Measurable: a project has specific benefits that can be
identified, quantified and valued, either socially or monetarily.
• A – Area bounded: Projects are conceptually, geographically, and
organizationally bounded.
• R – Real: Planning of a project and its analysis must be made
based on real information. It fits with real social, economic,
political, technical, etc. situations.
• T – Time bounded: A project has a clear starting and ending
point. The overall life of the project must be determined. 6
 1.2. The Concept(cont…)
3) It is a complex activity: A project is a complex set of
activities relating to diverse areas.
4) Requires team Work: Project is a team work and it
normally consists of diverse areas.
➢ There will be personnel specialized in their
respective areas and co-ordination among the diverse
areas calls for team work.
5) Risk and uncertainty are inherent: Changes occur
throughout the life span of a project as a natural
outcome of many environmental factors. The changes
may vary from minor changes to major changes which
may have a big impact or even may change the very
nature of the project.
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 1.2. The Concept(cont…)
6) It has a scope that can be categorized into
definable tasks.
o Projects usually have well defined sequence of
investment and production activities that should be
neither too small nor too large.

7) It may require the use of multiple resources.

8) A project is people‐oriented

9) A project is an instrument of change.

 1.2. The Concept(cont…)
A project normally originates from a plan, national
plan or corporate plan
• Projects are instruments for development plan, a particular
decision scheme meant to convert policies and plans into
reality.
• Plans without projects means non-implementation, paper tiger
decision makers, having plan documents for other purposes.
So, we have this generic scheme:

Work
Plan Programme Project Task
Package

• National/Corporate • health programme, • Power plant, • Water supply, power • Award of water
plan with target for educational hospital, housing supply and supply contract,
growth. programme, R&D project etc. distribution construction & 8
programme. package. foundation.
 1.2. The Concept(cont…)
It is necessary to distinguish between projects and
programs because there is sometimes a tendency
to use them interchangeably.
• While 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.
➢ One can think of projects as subunits and bricks of programs.
• For instance, a health program may include a water project as well as a
construction of health centers, both aimed at improving the health of a given
community, which previously lacked easy access to these essential facilities.
 1.3. Project cycle
Project cycle is a sequence of events, which a
project follows.
It is the various stage through which project
proceed from inception to implementation.
Different institutions and authors classify project
cycle into different phases. For instance
• The Baum Cycle /World Bank Procedures: is the first basic model
of a project cycle which has been adopted by the World Bank and
has five stages including
• Identification > Preparation>Appraisal and Selection >
Implementation > Evaluation
• Europe Aid Approach/The European Commission: This approach
consists of six phases and has been considered as the most recent
approach developed as guideline for development projects
• Programming > Identification > Appraisal > Financing, 10
Implementation > Evaluation
 1.3. Project cycle (cont…)
However, in most literatures and guide books the
stages or phases of projects are divided into six
phases and this approach is preferred in this
discussion:
i. Identification
ii. Pre-feasibility study
iii. Feasibility study Preparation and Analysis

iv. Selection (appraisal)

v. Implementation.
vi. Ex-post evaluation

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 1.3.1. Identification
Project starts by generating potential idea that can
be converted into a meaningful project.
Identification of promising investment
opportunities (projects) requires:
• imagination,
• sensitivity to environmental changes,
• And a realistic assessment of what the firm can do.
Where do we generate project ideas?
• There are two basic sources of project ideas.
These are :
1) Macro level sources
2) Micro level sources 12
 1.3.1. Identification(cont..)
1) Macro-level sources
1) National policies, strategies, sectorial, sub–sectorial
or regional plans.
2) General surveys,
• resource potential surveys, regional studies, master
plan and
• statistical publications that indicate directly or
indirectly investment opportunities.
3) Constraints on the development process due to
shortage of essential infrastructure facilities.
4) Unusual events such as draughts, floods, earth–
quakes, hostilities, etc.
5) From multilateral or bilateral development agencies and
as a result of regional or international agreements in
which the country participates. 13
 1.3.1. Identification(cont..)
2) Micro Level sources
a) The identification of unsatisfied demand or needs,
b) The initiative of private or public enterprises in response to
incentives provided by the government
c) The necessity to complement or expand investments previously
undertaken.
d) The suggestions of financial institutions and development
agencies.
e) Study of new Technological Development.
In general, there are around four major sources from
which ideas or suggestions for project may come:
• Project ideas from technical specialists
• Project ideas from local leaders
• Project ideas from entrepreneurs and
• project ideas from government policy and plans 14
 1.3.2. Pre-feasibility study
After we identify project ideas the next step is
project preparation and analysis that includes
both Pre-feasibility and Feasibility studies.
Pre-feasibility study is a preliminary study or
prelude to the full blown of feasibility study.
Pre-feasibility study is a meant to assess
• Whether the project is prima facie worthwhile to justify
a feasibility study and
• What aspects of the project are critical to its variability
and hence warrant an in -depth investigation.
In the pre-feasibility study stage, the analyst
obtains rough estimation of the major components
of the project’s costs and benefits. 15
1.3.2. Pre-feasibility study (cont..)
For this purpose, the following aspects have to be
looked into:
• Compatibility with the promoter
• Consistency with government priorities
• Availability of inputs
• Adequacy of market for the output
• Reasonableness of cost, and
• Acceptability of risk level
And 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, 16
• assume over ambitious sales and profitability,etc.
 1.3.3. Feasibility study
Pre – feasibility study should be viewed as an
intermediate stage. If the project is seemed to be
sound, the next stage is a feasibility study.
• The major difference between Pre-feasibility &
feasibility analysis lies on the amount of work
required in order to determine whether a project is
likely to be viable or not.
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.
• And a team of specialists, like Scientists, engineers,
economists, sociologists, environmentalists etc. are
needed to work together. 17
1.3.3. feasibility study (cont..)
To design and analyze effective projects, those
responsible must consider many aspects that
together determine how remunerative a proposed
investment will be.
Here we have divided the feasibility (project
preparation and analysis) into seven aspects:
1) Technical aspects
2) Institutional-organizational-managerial-aspects
3) Commercial aspects
4) Financial aspects
5) Social Aspects
6) Economic aspects and
7) Environmental aspects
Let us discuss these aspects one by one. 18
1.Technical aspects
The technical analysis concerns the project's
inputs (supplies) and outputs (production) of real
goods and services.
This aspect of project analysis addresses issues
related to:
• Material inputs and utilities
• Location (relatively area) and site ( specific area)
• Manufacturing process and technology
• Machines and equipment,
• Structure and civil works
• Project charts and layouts
• Work schedule
• Product mix
• Plant capacity 19
2. Institutional-organizational-managerial-aspects
A whole range of issues in project preparation
revolves around the overlapping institutional,
organizational, and managerial aspects of
projects,
Institutional aspects: A project analyst should
properly observe the institutional structure of the
country, region or area where the project is to be
carried out.
• Does the project takes into account the cultural setup
and customs of the beneficiaries? Or
• Will it disturb the accepted pattern norm and believe?
• If so, how should this be included as part of the
project design? 21
2.Institutional-organizational-managerial-aspects
The organizational aspects: It should be examined
to see that the project is manageable.
• Are authority and responsibility properly linked?
• Does the proposed organization take proper account of
the customs and organizational procedures common in the
country and region?
• Is a special monitoring group needed?
• What about training arrangements?
Managerial aspects: It is very crucial to good
project design and implementation.
• The analyst must examine the ability of available staff to
judge whether they can administer such a complex
activity.
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3. Commercial aspects
The commercial aspects of a project include the
arrangements for marketing the output produced by
the project and the supply of inputs needed to run
the project.
On the output side, the following questions should be
addressed
• Where will the products be sold?
• Is the market large enough to absorb the new production without
affecting the price? If the price is likely to be affected, by how much?
• Will the project still be financially viable at the new price?
• What share of the total market will the proposed project supply?
• Are there suitable facilities for handling the new production?
• Is the product for domestic consumption or for export?
• Does the proposed project produce the grade or quality that the market
demands
• What financing arrangements will be necessary to market the out p ut
2 2
3. Commercial aspects
Likewise on the input side, the following questions have
to be answered and analyzed
• Do market channels for inputs exist, and do they have enough
capacity to supply on time?
• Should new channels be established by the project or should special
arrangements be made to provide marketing channels for inputs?
To address the above output and input related
questions, we require information about the following
issues:
• The past and current demand (consumption) trend .
• Past and present supply positions.
• Imports and exports gap (when necessary).
• Market structure and nature of competition.
• The nature of the customers, their attitudes, and preferences.
• Distribution channels and marketing policies in use. 23
• constraints (Administrative, technical, and legal, etc)
3. Commercial aspects
To conduct such analysis, the analyst is advised to
follow the following steps:
1) Situational analysis: In this analysis the project
analyst may informally talk to: Customers, Competitors,
middlemen, and others in the industry (sector).
2) Collection of necessary information: Further
investigation requires collecting necessary information
from variety of sources such as
• Secondary sources: Census data, National sample survey,
Records of different organization and market agents, Plan
report, Newspapers, etc.
• Primary sources: Market survey on demand in different
segments of the market, customer preference and motives for
buying, customers’ purchasing plans and interventions, socio-
economic characterization of buyers. 25
3. Commercial aspects
3) Characterization of the market
• On the basis of the collected data the market of the
proposed product has to be characterized as follows:
a) Effective demand in the past and present: This is
measured by the actual consumption level.
b) Breakdown of demand: segmenting the market on the
basis of different characteristics like, Income group,
Geographic Location, Gender, Age category, Religion, etc
c) Prices: analyze or distinguish the types of prices like,
Manufacturing price, Wholesale price and Retail price
d) Suppliers: The market need to be characterized in terms
of supply of similar products.
e) Government policy:The market is characterized in terms of
the prevailing government policy regarding the market.

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3. Commercial aspects
4) Demand forecasting
• Once market is characterized, the next step is to
estimate or forecast future demand of the project
outputs and inputs .
• There are different demand forecasting techniques
which can be broadly divided in to two categories:
a) Qualitative method
b) Quantitative methods
a) Qualitative Methods: These method rely on the
judgment of experts to translate qualitative
information into quantitative estimates. The major
qualitative methods are,
a. Jury of Executive Methods
b. Delphi Method
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3. Commercial aspects
a. Jury of executive opinion methods: This method involves
soliciting the opinion of a group of managers/ experts on
expected future sale and combining them into a sales
estimate.
b. Delphi method: This method involves converting the views
of a group of experts, (do not interact directly to each
other), into a forecast through an iterative process. That
is, there is no direct contact between experts selected
for this purpose. Steps commonly used are,
• A group of experts are sent questionnaires by mail or by
some convenient means and are asked to express their view
about the future demand.
• Then, the responses collected from each of them are
summarized and sent back to the experts, along with
questionnaire meant to provide further reason for the their
view expressed in the first round.
• The process may continue two or more rounds till a
reasonable agreement emerges in the view of experts 27
3. Commercial aspects
b) Quantitative methods: These are more of analytical
and use empirical data in basic statistical models to
generate forecast about economic variables. Some of
these are:
1) Linear trend projection method (using OLS):This method involve
extrapolating the past trend onto the future using the function of the
form Yt=а+ ΒT+e; where Yt= demand for year t, T=time variable a=
the intercept term, Β =denotes the change in y per unit of time e= the
error term
2) Exponential smoothing Method: In exponential smoothing, forecasts
are modified in the light of observed errors. If the forecast value for
year t(Ft) is less than the actual value for year t(St),the forecast for
the year t + 1(Ft + 1)is set higher than Ft. Or if Ft > St, then Ft + 1 is
set lower than Ft. In general, F t + 1 = Ft + αet
3) Moving Average Method: This method smooths out fluctuations when
the data set show irregular variations. It is produced by averaging the
values of a consecutive set of data: three, four, five … periods.
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3. Commercial aspects
5) Market planning
• To enable the product to reach a desired market
segment, a suitable marketing plan should be
developed.
• It consists of the
• Current market situation: It explains the different
dimension of the current market conditions.
• Opportunity and issue analysis: In this section a SWOT
analysis is conducted in order to identify.
• Market Objective: This has to be clearly stated and it has to
be short and measurable as much as possible
• Marketing strategy: To achieve the above stated objective,
the plan should specify the appropriate strategy. It involves
target segment, product positioning, product line, price,
distribution, promotion activity
• Action plan (market program): 29
4. Financial analysis
Here, the project analysts is concerned with the
financial effects of the proposed project on each of its
various participants (firms, framers/workers,
government etc.).
Issues focused in this part are,
• Investment outlay and costs of the project(production cost)
• Means of financing, cost of capital(interest)
• Projected profitability, break-even point
• Cash flows of the project
• Investment viability judged in terms of various criteria of merit
• Projected financial position
• Level of financial risk

This part will be discussed comprehensively in chapter two

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5 Social aspects
project analysts are also expected to examine
carefully the broader social implications of
proposed investments.
In such evaluation the focus is on the social costs
and benefits of a project, which may often be
different from its monetary costs and benefits.
This is particularly related to,
• The income distribution implications of the project in
relation to employment creation,
• The balanced regional development,
• The displacement impact of the project,
• The implication of the adopted technology, for instance,
on gender;
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6 Economic Aspects
The economic aspect of project preparation is
primarily concerned with
➢ the determination of the likelihood of the proposed
project, and hence the committing of scares resources,
by justifying the significance of the project from the
whole economy point of view (the society as a whole).
➢ The financial and economic analyses are
thus complementary-
➢The financial analysis views from the participants (or owners)
point of view, while the economic analysis from the whole
economy point of view

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6 Economic Aspects
There are three very important distinctions
between the financial and economic analysis must be
kept in mind.
1) Treatment of taxes and subsidies: these items are treated as
transfers in the economic analysis while in financial analysis taxes are
usually treated as cost and subsides are treated as return income. The
reason for this distinction is basically the point of view (society as
opposed the firm)
2) Treatment of interest on capital. In economic analysis interest on
capital is never separated and deducted from the gross return since it
is part of the return from capital, which is available for the society as
a whole. Such interest is deducted from benefit stream in financial
analysis whose point of view is the firm and hence interest is a cost to
the firm.
3) Use of prices: in the financial analysis we still use actual market
prices. In economic analysis the market prices are adjusted to
accurately reflect social and /or economic values. The latter prices are
termed as shadow prices or accounting prices or economic prices3.3
7.Environmental analysis
Ecological analysis should be done particularly for
major projects, which have significant ecological
implications like power plants and irrigation
schemes, and environmental polluting industries.
The key questions raised in ecological analysis are:
1) What is the likely damage caused by the project to
the environment?
2) What is the cost of restoration measures required to
ensure that the damage to the environment is
contained within acceptable limits?

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 1.3.4. Selection (appraisal)
After a project has been prepared, it is generally
appropriate for a critical review or an independent
appraisal to be conducted.
This provides an opportunity to re-examine every
aspect of the project plan to assess whether the
proposal is appropriate and sound before large
sums are committed.
• If the appraisal team concludes that the project plan is
sound, the investment may proceed.
• But if the appraisal team finds serious flaws, it may be
necessary for the analyst to alter the project plan or to
develop a new plan altogether.

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 1.3.5. Implementation
The objective of any effort in project planning and
analysis is to have a project that can be
implemented to the benefit of the society.

After the project is prepared and evaluated, the

next step is implementing the project.

Implementation is the most important part of the

project cycle. In this stage,
• funds are actually disbursed to start the project
and keep running
• contracts are signed 36
 1.3.5. Implementation (cont…)
During the project implementation stage, the
following important points should be considered:
• All the stages of implementation should be completed
with in the time schedule allotted.
• The output stream should be the same as contemplated.
• The physical targets are to be realized within the
financial allocation.
• Project analysts (manager) must keep an eye over
changes in technology, taste, price, profitability etc.

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 1.3.5. Implementation (cont…)
Generally, project analysts divide the
implementation phase into three time periods:
• The investment phase, where the major investments are
made. This may extend from three to five years.
• The development phase which may also extend from
three to five years.
• The project life.
The implementation phase for an industrial project
consists of several stages:
1) project and engineering designs,
2) negotiations and contracting,
3) construction
4) training, and
5) plant commissioning.
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 1.3.6. Ex-post evaluation
Once a project has been carried out the actual
progress with the plans should be evaluated in
order to judge whether the decisions and actions
taken were responsible and useful.

However, evaluation is not limited only to

completed projects. Ongoing projects could also
be evaluated to find solutions for problems when
the project is in trouble.
The evaluation may be done by ,
• the project management,
• the sponsoring agency,
• or other bodies.
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 1.3.6. Ex-post evaluation(cont…)
Some of the benefits which can be obtained from
evaluation are,

• The reality of the assumptions that were made will be

evaluated;
• It provides an experience that is highly valuable in
future decision making
• It suggests corrective action to be taken in light of
actual performance;
• It helps in uncovering judgment biases;
• It induces a desired caution among project sponsors.

Generally, weakness and strengths should carefully

be noted so as to serve as important lessons for
future project analysis undertaking
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 Review questions
1) What is project? Why project carefully prepared?
2) Discuss the characteristic features of a project?
3) What is the basic difference between programs and projects
4) What is a project cycle? How different institutions and
authors classify a project cycle
5) What require to identify a promising project ideas? What are
the basic sources of project ideas
6) What is the basic difference between pre-feasibility and
feasibility analysis?
7) What issues have to be looked into during pre-feasibility
analysis? And what types of projects must be ignored?
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 Review questions
8) During feasibility analysis a project analyst must consider
about seven aspects together determine how successful a
proposed investment will be? What are these aspects? Briefly
discuss?
9) What are the concern of technical analysis of a project? what
issues must be taken in to account in this aspect?
10) What things should be analyzed in institutional-
organizational-managerial-aspects of a project?
11) What issues have to be included in commercial(demand and
market) aspects of a project analysis? What a scientific steps
should be keep an eye on to conduct such analysis?
12) Briefly discuss the different methods of demand forecasting?
13) What is the basic difference between financial and economic
aspects of a project analysis?
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End of the Beginning

Thank You!!!

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