Chapter Three

Project Development
3.1 Generation and Screening of Project Idea
▪ The search for promising project ideas is the first step towards establishing a successful
venture.
▪ Searching opportunities requires imagination, sensitivity to environmental changes, and
realistic assessment of what a firm can do.
▪ Many of the most important projects in developing countries emerge from the political
commitments of national leaders, as response to crisis, emergencies and external threats
or foreign governments’ policies and assistance agency priorities, etc.
Stimulating the Flow of Ideas
Often firms adopt a somewhat casual and haphazard approach to generation of project
ideas. To stimulate the flow of ideas, the following are helpful:
 cont’d …

1. SWOT Analysis: SWOT is an abbreviation for strengths, weaknesses, opportunities

and treats.
• SWOT analysis represents and a systematic effort by an organization to identify
opportunities that can be profitably exploited by it. Periodic SWOT analysis facilitates
the generation of ideas.
2. Clear Articulation of Objectives: The operational objectives of a firm may end up
with one or more of the following:
▪ Cost reduction
▪ Productivity improvement
▪ Increase in capacity utilization
▪ Improvement in contribution margin
▪ Expansion into promising fields
3. Fostering Conducive Climate: cont’d …

o To tap the creativity of people and to harness their entrepreneurial urges, a conducive
organizational climate has to be fostered.
3.2 Project Identification and Selection
o The first stage in the project life cycle is to find potential projects.
o Such projects usually start as new ideas which are carefully examined and if found
feasible and desirable are translated into projects.
3.2.1 Sources of project ideas
o There are many sources from which ideas or suggestions for projects may come.
1. Technical specialists 2. Local leaders 3. Entrepreneurs 4. Government policy
and plan 5. donors, 6. Non Governmental organizations (NGOs), 7. Planners, etc.
 cont’d …

o Government policy priorities, unusual events, external threats,

unsatisfied demands, under utilized natural resources, etc.
Who identifies projects?
➢ Various organizations, whether local or foreign, state owned or private,
government ministries, development banks, interest groups, NGOs and
of course individuals can identify projects.
Approaches to project identification
There are two major approaches to project identification :
(a) Top-down approach
(b) Bottom-up approach
a) Top-Down Approach
✓ Projects are identified based on demands from beyond the community.
✓This may include directives from:
• international conventions (such as Kyoto Protocol/climate change).

• international institutions that have determined particular priorities and thus

projects

• national policy makers identifying projects that pertain to party manifestos

and/or national plans.
b) Bottom-Up Approach

• In this approach community/ beneficiaries are encouraged to identify and

plan the projects themselves with or without outsiders.
Project Identification in Both Approaches:
 Involves needs assessment
- collecting, processing and analyzing data on problems/needs of
communities
 Review of secondary data
- Look at books, survey reports/ research papers, publications, media
reports, internet etc.
 Collecting and analyzing primary information
• Interviews
• Community mapping
• Focus Group Discussions
• Other methods
3.2.2 Steps in Project identification and selection
o Idea Generation :- Project selection process starts with the generation of
a project idea.
o Ideas are based on technological breakthroughs and most of the project
ideas are variants of present products or services.
o To stimulate the flow of ideas, the following are helpful:
a. Stakeholders analysis
o The main goal of stakeholders analysis is to identify, assess and develop an
idea/opportunity with a view to perceived needs and how well it fits into the
organization's programs and strategies.
o Stakeholder is any individuals, group or organization, community, with an interest in
the outcome of a program/project.
o Stakeholder participation in decision-making throughout the whole project
cycle (project planning, implementation, monitoring and evaluation) is likely to
result in:
1. Improved effectiveness 2. Enhanced responsiveness 3. Improved efficiency
4. Improved sustainability 5. Empowerment and increased self-reliance 6. Improved
transparency and accountability 7. Improved equity
SWOT stands for:
•Strengths - the positive internal attributes of the organisation
•Weaknesses - the negative internal attributes of the organisation
•Opportunities - external factors which could improve the organisation’s
prospects
•Threats - external factors which could undermine the organisation’s
prospects.
SWOT analysis represents conscious, deliberate and systematic effort by
an organisation to identify opportunities that can be profitably exploited
by it.
b) SWOT (Strength weakness opportunity threat) Analysis

SWOT analysis is a tool for institutional appraisal and a brainstorming

exercise in which the representatives of the organization participate fully.

Purpose:

• To assess the performance and capacity of the participating units,

divisions of organization.

• Each participating unit has to undertake SWOT analysis.

Periodic SWOT analysis facilitates the generation of ideas.
Operational objectives of a firm may be one or more of the following.
✓ Cost reduction.
✓ Productivity improvement.
✓ Increase in capacity utilisation.
✓ Improvement in contribution margin.
c) Problem Analysis
• Every project aims to help solve a problem that affects the target group or groups.
The problem analysis identifies the negative aspects of an existing situation and
establishes the “cause and effect” relationships among the problems that exist.
• Begins with identifying a core problem. A problem- is an obstacle, impediment,
difficulty or challenge, gap or any situation that needs solution
• Problems Analysis visually shows the causes and effects of existing problems in the
project area, in the form of a Problem Tree. It clarifies the relationships among the
identified problems.
Purpose:
- to identify major problems and their main causal relationships.
The problem tree has three different components:
1. The core problem
The core problem is the main problem of a given community and must be the starting
point for every project.
2. The causes of the core problem
Each problem has its own history, and we have to find out what underlying factors
(causes) have led to the current situation. Once identified, the causes (roots) of the
core problem are located under the core problem.
3. The effects of the core problem
The cause-and-effect chain can also be continued beyond the core problem. In this
case, the chain forms the set of events that are the effects of the core problem.
 High incidence of
Problem Tree malnutrition

Food shortages

Rice production Food production

in low lands High immigration
on hills decreasing rates
decreasing
Effect

Irrigation water does Irregular supply of Soil fertility Ethnic clashes in

not reach field in inputs for rice on hill slopes neighboring
desired quantity production is decreasing districts

Canals are Dikes are Soil erosion on

blocked degraded hill slopes

Cause

Poor maintenance
system for irrigation
facilities
 d) Objective Tree Analysis

 An objective tree is a technique for identifying the objectives that will

be achieved as a result of solving the problems cited in the problem
tree

 The objectives are also displayed as a series of means and ends

relationships.

 The ‘negative situations’ of the problem tree are converted into

solutions, expressed as ‘positive situations’.
e) Alternative Tree Analysis
• is a technique for identifying alternative solutions or course of action that
can be used to achieve the same or alternative objectives and the display of
this information in a simple format.

• is a process in which specific project strategies are selected from among the
objectives and means raised in Objectives Analysis, based upon selection
criteria.

• The aim of alternative strategy analysis is division of the objectives tree into
more consistent smaller sub-units that may, compose the core for a project.
3.2.3 Project Design/Preparation
3.2.3.1 Pre-feasibility study
o A pre-feasibility stage is stage of rough assessment on the financial, economical and
technical viability of the project.
o The identification of project ideas is followed by a preliminary selection stage on the
basis of their technical, economic and financial soundness.
o This is known as the pre-feasibility study stage.
The principal objectives of pre-feasibility study are to determine whether:
✓ All project alternatives have been examined.
✓ A detailed analysis through feasibility study is required.
✓ Functional or support studies [such as market surveys, laboratory tests or pilot tests]
are necessary.
 cont’d …
✓ The investment opportunity is viable or not on the basis of the available information.
✓ The environmental situation at the planned site and the potential impact is in line
with the national standards.
o The structure and contents of a pre-feasibility study are, hence, the same as that of a
detailed feasibility study.
o Particularly, the contents of the pre-feasibility should cover the following main
components of the study.
✓ A clear definition of the project idea and objectives; and its scope.
✓ Market analysis and marketing concept.
✓ Raw material and supply requirements.
✓ Location, site and environmental impact.
 cont’d …
✓ Engineering and technology (including production process)
✓ Organization and overhead costs.
✓ Human resource; especially managerial staff, (labor costs and training requirements
& costs).
✓ Project implementation schedule and budgeting.
❑ Pre-feasibility is an intermediate stage between opportunity/problem
identification and a detailed feasibility study.
❑ If the opportunity study [problem identification stage] is well-prepared and
comprehensive enough, the pre-feasibility stage could be by-passed. Hence, it is
not always necessary to undertake the pre-feasibility study.
3.2.3.2 Support study
o Support or functional studies cover specific aspects of an investment project.
o They are required as prerequisite for or in support of pre-feasibility and feasibility
studies.
o Such studies are particularly important for large-scale investment proposals.
Examples of these studies are:
▪ Market studies
▪ Raw material and factory supply studies
▪ Laboratory and pilot-plant tests
▪ Location studies
▪ Economies-of-scale studies
▪ Equipment selection studies
▪ Environment impact assessment
Feasibility study
oFeasibility stage is detail research and data gathering of economic, financial, technical,
social and environmental (ecological) impacts of the project.
oThe major difference between the pre-feasibility and feasibility studies is the amount of
work required in order to determine whether a project is likely to be viable or not.
o 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.
o In developing countries, it is not uncommon to find a situation where only a few
projects (implemented by governments and big organizations) are sufficiently prepared
and carefully selected.
o This happens because of several reasons. Some of the reasons could be:
 cont’d …
o Lack of enough skilled people to perform this task;
o There is some unwillingness to spend money in this process and
o The use of non-numeric selection models like:
1. Sacred cow: in this model, a project is usually suggested by senior and powerful
individuals in an organization and the idea is passed to the officers below.
2. Operating necessity: in this model, projects are initiated because they are required
to keep a system in operation.
3. Competitive necessity: projects are usually initiated and given a lot of support if
they will help an organization to maintain a competitive edge over other
originations.
4. Product line extension: this approach is used when a project is intended to develop
and distribute a new product(s)
 cont’d …
5. Comparative benefit model: this model is used when a firm has several projects which
must be considered and some ranking given.
❖ A feasibility study should provide all data necessary for an investment decision.
❖ The commercial, technical, financial, economic and environmental prerequisites for an
investment project should therefore be defined and critically examined on the basis of
alternative solutions already reviewed in the prefeasibility study.
Elements of feasibility study
• Market analysis
• Technical analysis
• Organizational analysis
• Political-legal analysis
• Financial analysis
• Economic analysis
• Social analysis, and
• Environmental analysis
• Cross –cutting issues
 1. Market analysis
➢ indicates the demand potential of the output of the project:

➢Such potential is determined by examining a number of factors such as the

demographic statistics of the areas or regions where the outputs will be sold, the
income levels of the people in these regions and what is contained in the
development plans of these regions.

➢It is important to establish whether or not there are competitors who are already
producing similar outputs and how much share of the market they command.

➢The gap in the market which competitors are unable to satisfy will form the basis
establishing the demanded potential.
 cont’d …
Market analysis should address the following questions:
1. Is the product for domestic or export consumption?
2. Is the market large-enough to absorb the new product without
affecting the price?
3. What share of the total market will the proposed product have?
4. What marketing strategies and distribution channels are required?
o The objective of undertaking market analysis is, therefore, to assess whether there
exists an unsatisfied demand for the product and to determine the share that can be
captured by the project through appropriate marketing strategies.
 2. Technical analysis
o Is concerned with the projects inputs (supplies) and outputs of real goods and
services and the technology of production and processing
o Its objective is to evaluate:
• The type of technology and its capacity,
• degree of integration (flexibility of manufacturing system),
• the production processes involved,
• the inputs and infrastructure facilities
•Technology is examined at two levels:

1. The technology used must be suitable for the realization of the specific objectives
of a given project.

2. Technology must be examined for suitably according to the socio-economic

environment.
 3. Organizational analysis
✓ Institutional/ organizational structure
✓ Management of the project:

Is focused on the following questions:

1. Are authority and responsibility properly linked?
2. Does the organizational design encourage delegation of authority or do too many
people report directly to the project director?
3. Does the project have sufficient authority to keep its accounts in order and to make
disbursements promptly?
4. is the project manageable? Team building, motivation of employees and managers
etc
 4. Political-legal Analysis

o A politically feasible project may be referred to as a "politically correct

project."

o Political considerations often dictate direction for a proposed project.

o This is particularly true for large projects with national visibility that may have
significant government inputs and political implications.

o Political feasibility analysis requires an evaluation of the compatibility of project

goals with the prevailing goals of the political system.

o All projects must also face legal scrutiny

• 5. Financial analysis

• Financial viability of the project is analyzed based on:

• Sources of funds/ estimates of cost of the project,
• Return of the project /profitability,

• Financial analysis is based on market price of goods and services

• It aims to see the feasibility from the view point of entrepreneurs,

investors and financiers (from private costs and benefits)
 6. Economic analysis
Economic analysis is basically concerned with the following:

▪ how to identify effects of the project on the society ;

▪ qualification of the effects of the proposed projects; and

▪ pricing of costs and benefits to reflect their values to society, shadow price or
accounting prices

Economic evaluation deals with the economic contribution and impact of a project at
the macro or national or society level.
Financial appraisal covers only private costs and benefits, while economic analysis
takes into account social costs and benefits.
 7. Social analysis
Examine the social implication of the project:
1. Weights for income distribution so that projects benefiting lower-income
groups will be favoured.
2. Considering carefully the adverse effects of a project on particular groups
of people in particular regions.
3. The impact of the project on improving the quality of life.
4. Considering the contribution of alternative projects in furthering the same
objectives.
 8. Environmental analysis

• The impact of the project on nature and its habitat such as plants
(forests), water, air, wild and domestic animals, human beings, etc.

• Some of the examples of the questions to be asked are:

• What chemicals and wastes are emitted from the project that
will pollute air and water?
• What hazardous chemicals are used that will harm the health
of employees and the people living around the project area?
 9. Cross- cutting issues Analysis
• Cross- cutting issues, recently, have received great attention in preparing any development
projects. Underestimation of these issues have resulted in undesirable outcomes which
include the lose of active ‘human labour, reduced productivity, under or over utilization of
the intended output/inputs, social disruption, poor human health etc.

• Currently project promoters/implementers, nevertheless, have shown increasing concerns

about the effects of these factors on the development project and policy makers are also
initiating these points to be entertained in any development projects preparation and
implementations

• Who Conducts the Feasibility Study? The government, donor agencies, consultants and any
interested person who can afford to do it
Thank you!