Chapter Two: Project

Cycle

What is Project Cycle?

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 Chapter two Project cycle
A project passes through a number of life
cycles called project cycle.
What is project cycle?
Project Cycle: Is the various stage through
which project proceed from inception to
implementation.
• It is a stage which project advance from
inception to maturity stage.
• The Project Analysis or appraisal is done in stage (Cycle)
and should provide information on:
- administrative feasibility, marketing, and technical
appraisal;
- financial capability;
- expected economic contributions,
- social objectives 2
 Project cycle (cont…)
A project cycle covers all the steps necessary
to bring a project to the point where
its technical,
economic and
financial feasibilities have been
established and it is ready for
appraisal.
• Each stage follows the proceeding one and
leads to the next.
• These different phases are identified by
different institutions and authors. Some of
the phases as identified by different authors
are the following.
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 An Overview of Project cycle
(Cont…)
The Baum Cycle (World Bank
Procedures)
• Baum (1970) model is the first basic
model of a project cycle which has
been adopted by the World Bank.
• According to this model a project cycle
consists of the following six stages.
• Identification
• Preparation
• Appraisal and Selection
• Promotion, Negotiations, Board presentations
• Implementation and supervision
• Evaluation
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 CONT…
• What does the World Bank do?
 Lending for development projects.

 The Bank's main business is to lend for

specific projects, carefully selected and
prepared, thoroughly appraised, closely
supervised, and systematically evaluated.
World Bank Project cycle
.

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 Keeling Ralph (2000) In his book Project
Management: An International Perspective
states the project cycle to have the following stages
• Conceptualisation
• Planning
• Implementation (execution)
• Termination
Patel (2000)
• Concept
• Planning
• Execution
• Termination
 An Overview of Project cycle
Gittinger (1996 ) (Cont…)
In his book Economic Appraisal of Agricultural projects defines
the cycle to be:-
Identification
Preparation and analysis
Appraisal
Implementation
Evaluation
Project Management Institute (PMI)
A Professional Institute coins the cycle in terms of:
Initiating
Planning
Executing
Controlling
Closing 8
The Asian Development Bank Project cycle
model

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 An Overview of Project cycle
(Cont…)
The European Commission/Europe Aid
Approach
 This approach consists of six phases and has
been considered as the most recent approach
developed as guidelines for development of
projects.
– Programming
– Identification
– Appraisal
– Financing
– Implementation
– Evaluation
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 An Overview of Project cycle (Cont…)
. Phases of the project cycle – UNIDO manual

Phase 1 – Pre-investment

Opportunity Prefeasibility Feasibility Appraisal &

study study Study Decisions

Phase 2 – investment

Construction Commissioning
Negotiation and Engineerin & Manpower
Contracting g Design & start up
training

Phase 3 – Operation

Phase 4 – Evaluation

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Phases of the project cycle – UNIDO manual

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 Pre-investment Studies
• Careful study of the prospects for success of
an industrial or commercial venture has not been
the rule throughout the world since the industrial
age.
• Even in the industrialized countries direct
investment is often undertaken in haste, avoiding
the trouble and cost of investigation, but
increasing the risk of failure.
• There are four stages to the Pre-investment
Studies
• Opportunity study
• Pre-feasibility study
• Feasibility study
• Appraisal decisions
 Pre-investment Studies

What is Opportunity study?

Discuss with your friends and list some of areas

that need to be considered in opportunity study?
Opportunity study
The identification of investment opportunities is the starting-
point in a series of investment- related activities.
The Objectives of the opportunity study :
Conduct refinement of business idea
Conduct preliminary evaluation of alternative approaches
Conduct preliminary assessment of strengths and weaknesses
of the concept
Characteristics of the study:-
Sketchy type based more on rough aggregate estimates than on
detail analysis
It is intended primarily to highlight the principal investment
aspects of a possible industrial proposition.
The purpose of such a study is to arrive at a quick and
inexpensive determination of the salient facts of an investment
possibility.
 opportunity study analyses the following
 Natural resources with potential for processing and
manufacture, such as timber for wood-based industries
 The existing agricultural pattern that serves as a
basis for agro-based industries
 Future demand for certain consumer goods that have
growth potential as a result of increased population
or purchasing power
 Imports, in order to identify areas for import
substitution
 Environmental impact
 Manufacturing sectors successful in other countries
with similar economic background and levels of
development, capital, labour and natural resources
 Possible interlinkage with other industries, indigenous
or transnational
 opportunity study analyses cont’d
Possible extension of existing lines of
manufacture by backward or forward
integration
Possibilities for diversification
Possible expansion of existing industrial
capacity to attain economies of scale
The general investment climate
Industrial policies
Availability and cost of production factors
Export possibilities
What is Pre-feasibility study?

Is it mandatory to conduct Pre-feasibility study?

Pre-feasibility study

The project idea must be elaborated in a

more detailed study.
However, formulation of a feasibility study
that enables a definite decision to be made on
the project is a costly and time-consuming
task.
Therefore, before assigning larger funds for
such a study, a further assessment of the
project idea might be made in a pre-feasibility
study
 Pre-feasibility study
The Objectives of conducting a prefeasibility study are:
Conduct Preliminary project assessment
Identify project alternatives
Identify critical aspects that require special support
studies such as project's design - product, technology,
marketing and distribution, capital structure.
Characteristics of the study:-
Intermediate level of detail based primarily on secondary
data between project opportunity study and a detailed
feasibility study
The difference being in the degree of detail of the
information obtained and the intensity with which project
alternatives are discussed.
The structure of a pre-feasibility study should be the
same as that of a detailed feasibility study.
 What is Feasibility study?

Compare and contrast Feasibility study with pre

feasibility study.
 Feasibility study
Should provide all data necessary for an investment
decision
The Objectives of conducting a feasibility study are:
• Provide commercial, technical, financial, and
economic information needed for investment decision
making
Characteristics of the study:-
• Clear project concepts and criteria
• Comprehensive project design
• Reliable information often primary data
• Quantified prediction of performance
• Detail analysis with high confidence level
• Consistent and defensible conclusions
• Selection criteria
Reading assignment
Read other phases and stages of UNIDO Manual
 An Overview of Project cycle
(Cont…)

However, in most literature and guide

books the stages or phases of projects
are divided into six phases and this
approach are preferred in this
discussion:
• Identification Project preparation
• Pre-feasibility study. and analysis
• Feasibility study
• Project appraisal and Selection
• Implementation.
• Ex-post evaluation
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 I. Identification
Project starts by generating
potential idea that can be
converted into a meaningful
project.
• Project identification involves finding
project’s idea, which could contribute
towards achieving specified
business/development objectives

• In many cases many projects start as a

simple idea and later on it may grown up
into a full-fledged project
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Identification (Cont …)
• Identification of promising
investment opportunities
(projects) requires
imagination,
sensitivity to
environmental changes,
And a realistic assessment
of what the firm can do
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 Identification (Cont …)
If the project is a private project the
initiating entity will define the
– concept,
– expectation and
– objectives of the project.
But, if the project is a public project,
sectoral information is an important
source to define the concept,
expectation and objective of the project.
.

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 Identification (Cont …)
Generally, the idea for project may
come from the following sources
• From the need to make profitable use
of available resources ( this is for
resources based projects)
• Market based projects arise from an
identified demand in home or overseas
market
• Need based project may arise from the
need of community (company) to make
available some basic materials
(services) requirements.
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 Identification (Cont …)
• Project ideas can also emanate
from government policy and plans

• From technical specialists like,

entrepreneurs and local leaders
are also common sources of
projects.
– Technical specialists and
entrepreneurs can identify many areas
where they feel new investment might
be profitable.
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 Identification (Cont …)
In general, the sources of project ideas can be
broadly classified into,

1. Macro-level
• National policies, strategies, sectoral,
sub – sectoral or regional plans
• General surveys,
– resource potential surveys,
– regional studies,
– master plan and
– statistical publications, which indicate
directly or indirectly investment
opportunities.
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 Identification (Cont …)
• Constraints on the development
process due to shortage of essential
infrastructure facilities
• Unusual events such as,
– droughts,
– floods,
– earth – quakes, hostilities, etc
• From multilateral or bilateral
development agencies and as a result
of regional or international agreements
in which the country participate

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 Identification (Cont …)
2. Micro Level
• The identification of unsatisfied
demand or needs
• The need to remove shortages in
– essential materials,
– services or
– facilities that constrain development
efforts;
• The initiative of private or public
enterprises in response to
incentives provided by the
government;

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 Identification (Cont …)
• The necessity to complement or expand
investments previously undertaken.
• The suggestions of financial institutions
and development agencies
• Study of new Technological Development

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 II. Pre feasibility study
After we have identified project ideas the next
step is project preparation and analysis.
Project preparation includes both Pre-
feasibility and Feasibility studies
Once a project idea is identified a preliminary
project analysis will be done ( i.e., pre-
feasibility study).
Which means the project idea must be
elaborated in sort of study.

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 Pre feasibility study
(Cont…)
Why pre-feasibility study?
Because, undertaking a
feasibility study that enables a
definite decision to be made on
the project is a costly and time –
consuming task.
Therefore, before assigning
larger funds for such a study,
preliminary assessment of the
project idea might be made in a
pre-feasibility study.

In the pre-feasibility study stage

the analyst obtains rough
estimation of the major
components of the project’s costs
and benefits.
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 Pre feasibility study
(Cont…)
Some of the main components
examined during the pre-feasibility
study include:
Availability of adequate market (or
beneficiaries)
project growth potential
investment costs, operational cost
and distribution costs
demand and supply factors; and
social and environmental
considerations
If the project is appeared to be
sound the next sages is a feasibly
stage.
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 III. Feasibility study
Pre – feasibility study should be
viewed as an intermediate stage.
A feasibility study should provide all data
necessary for an investment decision.
 The commercial,
 Technical,
 Financial,
 Economic and
 Environment

An investment project should be defined

and critically examined in the feasibility
study.
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 Feasibility study (Cont
…)
• Therefore, the structure of a pre –
feasibility study should be the
same as that of a detailed
feasibility study.
• The major difference between them
lies on the amount of work
required in order to determine
whether a project is likely to be
viable or not.
• Once the project is decided as
viable using pre-feasibility study, a
detailed analysis of issues should
be conducted like the following.
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 Feasibility study (Cont
…)
– marketing,
– technical,
– financial,
– economic, and
– environmental aspects is
undertaken in the feasibility
stage.
• Feasibility study provides a
comprehensive review of all aspects
of the project and lays the
foundation for implementing of the
project and evaluating it when
completed.
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 Feasibility study (Cont
…)
In the feasibility study, a team of
specialists, like
– Scientists,
– engineers,
– economists,
– sociologists,
– environmentalists etc are needed to
work together.
–
If the project is viable, the next step is project
appraisal and selection stage. Which means,
in the feasibility stage more accurate data
need to be obtained in order to proceed to
the next stage.
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 Feasibility study (Cont
…)
• Finally, the feasibility report should include
(but not limited) the following analysis:
• Market analysis
• Technical analysis
• Organizational analysis
• Financial analysis
• Social – economic analysis, and
• Environmental analysis

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 IV. Project appraisal and
Selection)
• The feasibility study would enable the project
analyst to select the most likely project out
of several alternative projects.
• Selection follows, and often overlaps with the
feasibility analysis.
• It addresses the question
• is the project worthwhile?

• A wide range of appraisal criteria have been

developed to judge the benefits of a project.
• The criteria are divided into two broad
categories.
• non-discounting criteria and
• discounting criteria.
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 Project Appraisal (Cont…)
• After a project has been prepared,
it is appropriate to forward for a
critical review (external review)
• 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.
• Project appraisals cover the
following aspects,
a) Technical – here the appraisal concentrate
in verifying whether the proposal will work in
the way suggested or not.
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 Selection (Cont…)

b) Financial – this will try to see

 if money needed for the project have
been calculated property,
 their sources are all identified,
 and reasonable plans for their
repayment are made where necessary.
c) Commercial –
 the way the necessary inputs for the
project are supplied
 and the arrangements for the supply of the
products are verified

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 Selection (Cont…)
d) Incentive – whether things are arranged
in such a way that all those whose
participation is required will find it in their
interest to take part in the project, at
least to the extent envisaged in the plan.
e) Economic – the appraisal here tries to
see whether what is proposed is good
from the perspective of the national
economic development.
– The effects (positive and negative) are taken into
account and check if all are correctly valued

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 Selection (Cont…)

f) Managerial – this aspect of the appraisal

examines if the capacity exists for operating the
project and see if those responsible ones can
operate it satisfactorily.
Moreover, it tries to see if the responsible are given
sufficient power and scope to do what is required.
g) Organizational – the appraisal examines the
project how it is organized internally and
externally.
This helps to if arrangement and its organization
allow the proposals to be carried out properly and
to allow for change as the project develops.
These issues are the subjects of specialized
appraisal report.
And on the basis of this report, financial
decisions are made – whether to go ahead
with the project or not.
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 V. 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 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

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Implementation (Cont …)
 A major priority during this stage is to
ensure that the project is carried out in the
way and within the period that was
planned.
 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.

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Implementation (Cont …)
The output stream should be the same as
contemplated.
The physical targets are to be realized with
in the financial allocation.
Project analysts (manager) must keep an
eye over changes in
technology,
taste,
price,
profitability etc.
In the case of private investments,
profitability is to be so insured that
investment funds are expected from within.

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Implementation (Cont …)
However, Problems frequently occur
when the economic and financial
environment at implementation
differs from the situation expected
during appraisal.
For example, price or political
environment may change.

Due to these facts, project

implementation must be flexible and
original proposals are modified
frequently to capture these changes.
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Implementation (Cont …)
The implementation phase for an
industrial project consists of
several stages:
(i) project and engineering designs,
(ii) negotiations and contracting,
(iii) construction
(iv) training, and
(v) plant commissioning.

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 VI. Ex-post evaluation
The final phase in the project cycle is
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.

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 Ex-post evaluation
(Cont…)
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.

Moreover, evaluation should be

undertaken when a project is terminated
or is well into routine operation.

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 Ex-post evaluation
evaluation are,
(Cont…)
Some of the benefits which can be obtained from

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

the 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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