PROJECT IDENTIFICATION

CHAPTER TWO
PROJECT IDENTIFICATIONS and FORMATION

INTRODUCTION Page | 1
Project identification is the first phase in the project life-cycle – which is finding out of a business
or investment opportunity. That is project is conceived out of problems and/or opportunities. This
phase is an innovation process and it involves identifying a deliverable to be produced and the
benefits expected from the deliverable. The process in project identification includes collection,
compilation and analysis of economic data for the purpose of locating the possible opportunities
for investment. Identification of such opportunities requires imagination, sensitivity to
environmental changes, and realistic assessment of what the firm can do. The task is partly
structured, partly unstructured, partly dependent on convergent thinking, partly dependent on
divergent thinking, partly requiring objective analysis of quantifiable factors, and partly requiring
subjective evaluation of qualitative factors, partly amenable to control, partly dependent on
fortuitous circumstances. Identification is often the outcomes of a triggering process rather than
an analytical exercise.

Phases of Project Identification

There are four key phases of project identification. These are:
I. Actual Project Identification: The generation of project ideas by formal and informal
institutions and individuals.
II. Description of Project Idea: An actual written description of the project idea or concept,
summarizing the main elements of the proposed project to use in the screening, raking and
prioritization of project ideas.
III. Screening: An initial review of project ideas and concepts to see if they should be
advanced or abandoned at an early stage.
IV. Prioritization: The ranking and selection of projects against a set of criteria to identify the
“best projects to move actively into the designed stage and development

I. Project Identification (generation of project idea)

The search for promising project ideas is the first step towards establishing a successful venture.
Good project ideas- the key to success-are elusive. So a wide variety of sources should be tapped
to identify them. Usually there are two major sources where project ideas originate: the MACRO
AND MICRO sources.
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1. MACRO SOURCES OF PROJECT IDEA

Macro level, Project ideas originate from, among others:
• National, sector or regional plans,
• Unusual events such as droughts, floods, earthquakes, etc Page | 2
• Multilateral or bilateral development agencies,
• Regional or international agreements in which a country participates, etc
2. Micro level project ideas can emerge from;
• Existence of unused or underutilized natural and human resources and the perception of
opportunities for their efficient use.
• Identification of unsatisfied demand or needs
• Need to remove shortage in essential materials, services, or facilities that constrain the
development effort etc
• SWOT Analysis: This represents a conscious, deliberate, and systematic effort by an
organization to identify opportunities that can be profitability exploited by it. Periodic
SWOT analysis facilitates the generation of ideas.
• Clear Articulation of objective: A clear articulation and prioritization of objectives helps
in channeling the effort of employees and prods them to think more imaginatively.
• Fostering a conducive climate: To tape the creativity of people and harness their
entrepreneurial urges, a conducive organizational climate has to be fostered.

Other sources of project ideas

1. Analyze the performance of existing industries

A study of existing industries in terms of their profitability and capacity utilization can
indicate promising investment opportunities. Opportunities, which are profitable and
reliable, risk free and examination of capacity utilization of various industries provides
information about the potential for further investment. Such a study becomes more useful
if it is done region wise, particularly for products, which have high transportation costs.

2. Examine the inputs and out puts of various industries

An analysis of the input required for various industries may throw up project ideas.
Opportunities exist when1) materials, purchased parts or supplies are presently being
procured from distant sources with attendant time lag and transportation cost, and 2)
several firms produce internally some components/parts, which can be supplied at a
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lower cost by single manufacturers who can enjoy economies of scale. Similarly a study
of the output of the existing industries may reveal opportunities for adding value
through further processing of the main outputs, by products as well as waste products.

3. Review import and exports Page | 3

An analysis of import statistics for a period of five years is helpful in understanding the
trend of imports of various goods and the potential for import substitution. Indigenous
manufacture of goods currently imported is advantageous for several reasons:
✓ It improves a balance of payment situations
✓ It generates employment
✓ It provides a market for the supporting industries and services.
Likewise, an examination of export statistics is useful in leading about the export possibilities of
various products.
4. Study plan outlays and governmental guidelines
The government plays a very important role in the country’s economy. Its proposed
outlays in different sectors provide useful points toward investment opportunities. They
indicate the potential demand for goods and services required by different sectors.
The government publication provides information about the structure and location.

5. Suggestions of financial institutions and development agencies

In a bid to promote development of industries in their respective states, state financial
corporations, state industrial development corporations, and other development bodies
conduct studies, prepare feasibility reports, and offer suggestions of potential
entrepreneurs. The suggestions of these agencies are helpful in identifying promising
projects.
6. Investigate local materials and resource
A search for projects ideas may begin with an investigation into local resources and
skills, various adding value to locally available material may be examined. Similarly,
the skills of the local artisans may suggest products that may be profitably produced
and marketed.
7. Analyze economic and social trends
A study of economic and social trends is helpful in projecting demand for various goods
and services. Changing economic conditions and consumer preferences provide new
business opportunities.
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8. Draw clues from consumption abroad

Entrepreneurs willing to take higher risks may identify projects for the manufacturer of
products or supply of services, which are new to the country but extensively, used
abroad.
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Automatic vending machines, entertainment parks, prefabricated houses, and fast food
restaurants are examples of projects belonging to this category.
9. Explore the possibilities of reviving sick units
Industrial sickness is ram plant in the country. There are innumerable units, which have
been characterized as sick. These units are closed or face the prospect closure. A
significant proportion of sick units, however, can be nurses back to health by sound
management, infusion of further capital, and provision of complementary inputs.
Hence, there is a fairly goods scope for investment in this area.
10. Identify unfulfilled psychological needs
For well established, multi brand product groups like bathing soap, detergents,
cosmetics, and toothpaste, the question to be asked is not whether is an opportunity to
manufacture something to satisfy an actual physical need but whether these are certain
psychological needs of the consumers which are presently unfulfilled. To find out
whether such an opportunity exists, the techniques of spectrum analysis are useful. This
analysis is done in the following manner: (i) important factors influencing brand choice
are identified; (ii) existing brands in the market are positioned on a continuum in
respect of the factors identified in step i. (iii.) gaps which exist in relation to consumer
psychological needs are identified.
11. Attend trade affairs
National and international trade fairs provide an excellent opportunity to get to know
about new products and developments.
12. Stimulate creativity for generating new product ideas
Thinking along the following lines may generate new product ideas: modification
rearrangement, reversal, magnification, reduction, substitution, adaptation and
combination.

II. Project Concepts and Profiles

Once a project idea has been conceived, the next stage is to describe the idea so that it can be
prioritized and move on to the next stage in the process. This may involve the preparation of a
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project identification report or project concept or profile. Whenever it is developed it is essential

to have a clear idea of what the proposed project is supported to be and what are hopes to achieve.
It should include answers to the questions given below. Questions and Project Profile or Concept
Justification and Purpose
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• What goal is the project contributing to?
• What is the purpose of the project, what does it intend to achieve?
• What problem is the project addressing?
• What is the justification of the project?
• What demands, needs or opportunities is the project addressing?
Beneficiaries and Stakeholders Best regards,
• What will benefit from the project?
• Who has a share or s take in the project?
• How have project beneficiaries and other stakeholders participated in the identification of
the project?
• Which institutions are the targets of the project?
Resource and Institutions
• What potential resources may be available for implementing the project?
• Which organizations are to be involved in project planning and implementations?
Policies and Plans
• How does the project proposal fit into any sector or regional plans?
• Does the project fit into current policies?
Impacts
• What are the likely major positive and negative social impacts of the project?
• What are the likely positive and negative environmental impacts of the project?
Support
• What is the level of political and administrative support for the project?
• Does the project have the support of beneficiaries and/or local communities?
Risks
• What are the chances of the project achieving its objective?
• What are the main risks associated with the project?
• What assumptions have been made, e.g., what support is needed for others?
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III. Screening
At identification stage an initial screening of project idea will take place, with some
projects ideas being abandoned as impractical or of a low propriety. This is done to
assess:
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• Whether the project is prima facie worthwhile to justify a feasibility study, and
• What aspects of the project are critical to its viability and hence warrant an in –
depth investigation.
For this purpose, the following factors should be considered:
Compatibility with the promoter: The ideas must be compatible with the interest,
personality, and resources of entrepreneur.
Consistency with government Proprieties: The project idea must be feasible given the
national goals and governmental regulatory framework. The questions raised in this
context are; is the project consistent with national goals and priorities, are there any
environmental effects contrary to government regulations, can the foreign exchange
requirements of the project be easily accomplished, will there be any difficulty in
obtaining the license for the project, and so on.
Availability of Inputs: The resources and inputs required for the project must be
reasonably assured. To assess this, it important to answer question such as; are the
capital requirements of the project within manageable limits, can the technical know-
how required for the project be obtained, are the raw materials required for the project
available domestically at a reasonable cost, if the raw materials required to be imported
will there a problem, etc.
Adequacy of the Market: The size of the present market must offer the prospect of
adequate sales volume. Further, there should be a potential for growth and reasonable
return on investment. To judge the adequacy of the market the following factors have
to be examined.
▪ Total present domestic market
▪ Competitors and their market share
▪ Export market
▪ Qualify – price profile of the product vis-à-vis competitive products.
▪ Sales and distribution system
▪ Projected increase in consumption
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▪ Barriers to the entry of new units

Reasonableness of Costs: The cost structure of proposed project must enable it to
realize an acceptable profit with a competitive price. The following should be
examined in this regard:
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➢ Cost of material inputs
➢ Labor cost
➢ Factory overheads
➢ General administration expense
➢ Selling and distribution costs
➢ Services costs
➢ Economics of sale
Acceptability of Risk Level: The desirability of a project is critically dependent on the
risk characterizing it. In the assessment of risk – a difficult task, indeed – the following
factors should be considered:
✓ Vulnerability of business cycle
✓ Technological changes
✓ Competition from substitutes
✓ Competition from imports
✓ Governmental control over price and distribution.

Finally based on the above assessment, the analyst should eliminate project
proposals that:
• Are technically unsound and risky
• Have no market for the output
• Have inadequate supply of inputs
• Are very costly in relation to benefits
• Assume over ambitious sales and profitability, etc.
As a result, some of the project alternatives will be rejected and those are promising
will be advanced to the next stage called project preparation.

IV. Prioritization & Ranking

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The limited resources available mean that effective project identification and selection at various
levels will be essential. There will be more ideas for potential projects than resources available.
Potential criteria for ranking projects are given below.
Examples of Criteria for Ranking Project
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Extent
• Number of people and Geographic area affected by the project- More people affected
means the project will be given more weight
Economic and Financial
• Potential financial and economic benefits to the country or region and individuals.
Environmental; Impact of the project on
• Conservation of natural resources and more sustainable land use
• Protection of natural resources (e.g., forests)
Social;
• Contribution of the project to Poverty alleviation and Assistance to disadvantage groups
Policy is the project in line with national policies
Resources;
Availability of human resources to implement project
• Likely availability of funding from government, etc
Success or Failures;
• What is the chance of the project successfully meeting its objectives? What degrees of the
risks are associated with the project that may affect its implementation?
Support
• Political support for project
• Community support and demand for project.
During selection process, each project can be assessed against each of the criteria to give a rating.
At this stage of the project cycle this more likely to be qualitative than quantitative. Certain criteria
can be given greater weighting to reflect the importance of the criteria in determining the overall
rank of the project.

Project Rating Index

When a firm evaluates a large number of project ideas regularly, it may be helpful streamline the
process of preliminary screening. For this purpose, a preliminary evaluation may be translated
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into a project rating index. The steps involved in determining the project rating index are as
follows:
1. Identify factors relevant for project rating
2. Assign weights to these factors (the weights are supposed to reflect their relative
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importance).
3. Rate the project proposal on various factors, using a suitable rating scale (Typically a 5 –
point scale or a 7 – point scale is used for this purpose.)
4. For each factor multiply the factor rating with the factor weight to get the factor score.
5. Add all the factor scores to get the overall project rating index.
The following table illustrates the determination of the project rating index. Once the project rating
index is determined, it is compared with a pre – determined hurdle value to judge whether the
project is prima facie worthwhile or not.
Construction of a Rating Index
Factors Factor Rating (Step 3 &4) Factor
(Step 1 Weight VG G A P VP Score
(Step) 5 4 3 2 1 (Step 5)
Input availability 0.25  0.75
Technical Know-how 0.10  0.40
Reasonableness of cost 0.05  0.20
Adequacy of market 0.15  0.75
Complementary relationship
With other products 0.15  0.20
Stability 0.10  0.40
Dependence on firm’s
Strength 0.20  1.00
Consistency with
Governmental priorities 0.10  0.30
1.00 Rating Index 4.00