CHAPTER TWO

PROJECT CYCLE
What is a Project Cycle and Why?

The project cycle considers various stages in which each stage not only is
grown out of the proceeding ones (i.e. activities in progress) but also leads
into the subsequent ones.

Project cycle is a self-renewing cycle in that new projects may grow out of
the old ones in a continuous process and self-sustaining cycle of activity.
These processes can usefully be considered as a comprehensive
sequence in the sense that for the project that is implemented, each stage
naturally follows the proceeding one and leads on to the next.

Actually, the division into stages is artificial; but it helps to understand

project planning, though a continuous process, has distinct phases and
stages. Therefore, throughout the project cycle, the primary preoccupation of
the analyst is to consider alternatives, evaluate them, and to make
decisions as to which of them should be advanced to the next stage in the
planning process.

Models of Project Cycle

There are different models of project cycle but the following are discussed as
an instance

1. The Baum’s Project Cycle

2. The UNIDO Project Cycle”.
3. The DEPSA’s Model.

1. The Baum Project Cycle (World Bank Project Cycle)

A project with the characteristics already outlined above typically run

through at least several separable stages that can be thought of as
constituting a definite sequence, which some writers and institutions have
called “a project cycle”. In this regard, the first basic model was
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 developed by Warren C.

Baum in 1970, which was by then adopted by the World Bank as a project
cycle. Initially, this model had recognized only four main stages in the project
cycle, namely:

1. Identification
2. Preparation
3. Appraisal and Selection; and
4. Implementation

Later in 1978, the author has added additional two stages called
“Negotiation” and "Evaluation”. In this version of the Baum model, the
issue of negotiation comes when projects pass the appraisal process and
become a candidate for realization. It is after appropriate negotiations that
projects become implementation entity. Then, projects already implemented
will be the concern for evaluation, which usually closes the cycle as
evaluation often gives rise to the identification of new projects. This model,
therefore, includes six identifiable stages in the project cycle. The World Bank
accepted the amendment and adopted the new version since then.

1. Identification
The first stage in the project cycle and in the planning process too, is to
search for and identify potentially feasible projects. The sources for
identifying such projects may be one or more of the following:

 “Resource-based” project ideas that stem from the opportunity

to make profitable use of available resources.
 Some projects may be “market-based”, the idea of which is arising
from an identified demand in home or overseas markets.
 Others may be “need-based”, where the purpose is to try to make
available to all people in an area of minimal amounts of certain basic
material requirements and services.
 Well-informed “technical specialists” and “local leaders” are
also common sources of project ideas.
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Technical specialists could identify areas with technical deficiencies, where
they feel that new investments might be profitable; while local leaders
may provide some insights regarding existing problems and bottlenecks,
where investments need to be carried out for alleviating the same.

Ideas for new projects also come from “proposals to extend and/or
expand existing programs and projects” as well as from identifying
technological alternatives. In general, most projects start as an
elementary idea. Some simple ideas are elaborated to the extent that
eventually the name “project” can formally be given to it.

2. Preparatio
n
Once projects are identified, there begins a new stage that calls for
progressively more detailed preparation and analysis of a project's aspects.
At this stage, the project is being seriously considered as a definite
investment action.

 Project preparation, (also called project formulation), involves pre-

feasibility and feasibility studies and covers the establishment of
commercial, technical, institutional, financial, and socio- economic
feasibility.
 To this end, decisions have to be made on the scope of the project,
location and site, soil and hydrological requirements, project size
(farm or factory size), etc.
 Resource base investigations are undertaken and alternative forms of
projects are explored.
 Complete technical specifications of distinct proposals
accompanied by full details of financial and economic costs and
benefits are the outcome of the project preparation stage.
 The project now exists as a set of tangible proposals. Practically,
project design and formulation is an area in which local and
international consultants are very active, especially for big projects
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 that cover large areas and have big budgets.

3. Appraisal and Selection

After a project has been prepared, it is generally appropriate to make a
critical review or conduct an independent appraisal.
This provides an opportunity to re-examine every aspect of the project
plan and hence, helps to determine whether the proposal is
appropriate, sound, and acceptable or not before large sums are
committed.
Generally, internal government staffs only used, for public projects, for
this work and not consultants, and projects, in this regard, are apprised
both in the field and at the desk level.
For private investments too, only internal staffs opt to involve in the
appraisal process.
Appraisals should cover at least seven aspects of a project, each of
which must have been given special considerations during the project
preparation phase.

The seven aspects, in this regard, are the following:

1. Technical: here the appraisers concentrate in verifying whether what is
proposed will work in the way suggested or not.
2. Financial: the appraisers try to see if the requirements for money
needed by the project have been calculated properly, their sources are
all identified, and reasonable plans for their repayment are made where
necessary.
3. Commercial: the way the necessary inputs for the project are
conceived to be supplied is examined and the arrangements for the
disposal (marketing) of the products are verified.
4. Incentive: the appraisers see to it 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.
5. Economic: the appraisers here try to see whether what is proposed is

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 good from the viewpoint of the national economic development
interest, all project effects (positive as well as negative) are taken into
account, and check if all are correctly valued. Socio-economic aspect is
the other name given to the same.
6. Managerial: this aspect of the appraisal process 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.
7. Organizational: the appraisers examine the project if it is organized
internally and externally into units, contract, policy, institution, etc so as
to allow the proposals to be carried out properly and to allow for change
as the project develops.

The appraisal process builds on the project plan, but may involve new
information if the appraisal team feels that some of the data used at
preparation or some assumptions are faulty.

The implications and/or impacts of the project on the society and the
environment are also more thoroughly investigated and documented.
Similarly, the technical design, financial measures, commercial aspects,
incentives, and economic parameters are thoroughly scrutinized. These
issues are the subjects of specialized appraisal report. Based on an appraisal
report, decisions are made whether to go ahead with the project or not. The
appraisal may also change the basic project plan or develop a new plan. To
this end, comments often made at the appraisal stage frequently give rise
to alterations in the project plan (project proposal).

After appraisal, the viable project proposals are chosen for implementation
on the basis of the priorities of the stakeholders and the available
resources. For instance, the Treasury, for public projects, may impose a
ceiling on the ministries with a big portfolio of investments, calling for
prioritization of the core over lower priority projects. In practice, there can be
quite sequence of project selection decisions.

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If the project involves loan finance, the lender will almost certainly wish to
carry out its own appraisal before completing negotiations with the borrower.
Following appraisal, some projects may be discarded as well.

4. Negotiation and Financing

Once the project to be implemented is agreed on, for donor funded
projects, discussions are held on funding and associated aspects of funding
such as

Conditions for grants,

Repayment period,
Interest rates on loans,
Flow of funds,
Contributions from stakeholders, and
Whether there is co-financing or not.
This culminates into an “Agreement Document” for the project, which
binds all the parties involved during implementation of the project.

5. Implementation

The objective of any effort in the process of project planning and analysis,
clearly, is to come up with projects that can be implemented and/or realized
to the benefit of the society.

Thus, implementation is, perhaps, the most important part of the

project cycle.
In this stage, funds are actually disbursed to get the project started
and keep running.
A major priority during this stage is to ensure that the project is
carried out in accordance with the basic plan (i.e. within the cost,
quality, and time standards).
Problems frequently occur as the economic and financial environment
during implementation often differ from the expectations at the time
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of appraisal.

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Frequently, original proposals are modified, though usually only with
difficulty, because of the need to get agreement between the parties
involved.

 It is during implementation that many of the real problems of projects

are first identified.
 Because of this, the feedback effects on the discovery and
design of new projects as well as the deficiencies in the capabilities
of the project actor can be revealed.
 To this end, to allow the management to become aware of the
difficulties that might arise, recording, monitoring, and progress
reporting should be integral parts of the implementation stage.

Some of the aspects of implementation that are of particular relevance to

project planning and analysis, therefore, are the following:

i The first is that, the better and more realistic a project plan is, the
more likely that the plan can be carried out and the expected benefits
realized.

 This emphasizes once again the need for careful attention to

each of the seven aspects of projects.

ii. The second is that, project implementation must be flexible.

 Circumstances will change and, therefore, project managers

must be able to respond intelligently to these changes.
 The common ones are technical changes (soils, water logging,
and nitrogen application); price changes; economic policy and
environmental changes; political changes, etc.
 Moreover, all these alter the way in which projects should be
implemented.

6. Evaluation
The final phase in the project cycle is evaluation. Once a project has been
carried out, it is often useful, (though not always done),

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  To look back what took place in the past,

 To compare actual progress with the plans, and

 To judge whether the decisions and actions taken were responsible and
useful.

The extent to which the objectives of a project are being realized provides
the primary criterion for an evaluation. The analyst looks systematically at
the elements of success and failure in the project experience to learn how
better to plan. Evaluation is not limited only to completed projects.

 It is a most important managerial tool in on-going projects as

formalized evaluations may take place at several times in the life of a
project.
 Evaluation may be undertaken when the project is in trouble as the first
step in a re-planning effort.
 Careful evaluation should precede any effort to plan for new projects
and it is also needed to follow-up the progress of projects.
 Moreover, a final evaluation should be undertaken when a project is
terminated or is well into routine operation.

Different groups or units may do the evaluation of projects. Among others,

Project’s management unit often continuously evaluates its

experience as implementation proceeds.
The sponsoring agency, perhaps, the operating ministry, the
planning agency, or an external assistant agency may undertake
evaluation.
In large and innovative projects, the project’s administrative
structure may provide a separate evaluation unit responsible
for monitoring the projects' implementation and for bringing
problems to the attention of the projects’ management.
Evaluation can help not only in the management of the project
after the initial phase, but also help in the planning of future
projects.
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 Experience with one project can give rise to new ideas for
extension of the project, repetition, need for associating projects
“vertically”

that supply inputs to or process products from this project, and

other ideas that become the seeds to generate new project
proposals.

The UNIDO Project Cycle

The UNIDO has established a project cycle comprising the following three
distinct phases:

1. The pre - investment phase

2. The investment phase, and
3. The operating phase

Each of these three phases is divided into stages, some of which constitute
important consultancy, engineering, and industrial (manufacturing) activities.
In this regard, increasing importance should be attached to the pre-
investment phase as a central point of attention, because the success or
failure of an industrial project ultimately depends on the marketing, technical,
financial, and economic findings and their interpretations, especially in the
feasibility study.

To reduce wastage of scarce resources, a clear comprehension of the

sequence of events is required when developing an investment proposal from
the conceptual stage by way of active promotional efforts to the operational
stage.

1. The Pre–Investment Phase

According to the UNIDO, Manual for Industrial Feasibility Study, the pre-
investment phase comprises several stages. These are:

 Identification of investment opportunities (opportunity studies);

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  Analysis of project alternatives, preliminary project selection, and
project preparation (pre-feasibility and feasibility studies);and
 Project appraisal, selection, and investment decision (specialized
appraisal reports)

Support or functional studies are also part of the project preparation

stage and are usually conducted separately, for later incorporation of the
findings in a pre-feasibility study or feasibility study as appropriate. Though
it is easier to grasp the scope of an opportunity study, it is not an easy task
to differentiate between a pre-feasibility and a feasibility study in view of the
frequently inaccurate use of these terms.

The division of Pre-investment phase in to stages avoids the attempt to

proceeding directly from project idea generation (identification) to the
final feasibility study without examining the project idea systematically or
being able to present alternative solutions. This cuts out many feasibility
studies that would have little chance of reaching the investment phase.

This also ensures that the subsequent project appraisal task, made by
national or international financing institutions, becomes an easier task when
based on well-prepared studies. All too often, project appraisal actually
amounts to project preparation, given the low quality of the feasibility
study undertaken and poorly prepared document submitted.

A. Opportunity Studies

The identification of investment opportunities is the starting point in a series

of investment related activities, when potential investors (private or public)
are interested in obtaining information on newly identified viable investment
opportunities.

In this regard, the main instrument used to quantify the parameters,

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information, and data required to develop a project idea into a proposal is
the opportunity study, which should analyze:

 Natural resources,
 The existing agricultural base (it may be the basis for agro-industries),
 Future demand for consumer goods,
 Imports substitution and export possibilities,

 Environmental impacts (mandatory or non-revenue producing

projects),
 Expansions of existing capacity,
 Manufacturing sector (benchmarking from other countries),
 Diversification

Opportunity studies are rather sketch in nature and rely more on aggregate
estimates than on detailed analysis. To this end, opportunity studies could
be general or specific.

General opportunity studies, (referred to as “sector approach”), could be

area studies designed to:

Identify opportunities on a given area (Administrative province,

backward region, etc);
Industry studies to identify opportunities in delimited industrial branch
and
Resource-based studies to reveal opportunities based on the utilization
of natural, agricultural, or industrial resources.

Specific project opportunity studies, (referred to as "enterprise

approach"), are seen, for instance, in the form of products with potential for
domestic manufacturing. A specific project opportunity study may be defined
as the transformation of a project idea into a broad investment proposition.

In general, a project opportunity study should not involve any substantial

cost, as its intention is primarily to highlight the principal investment
aspects of a possible industrial proposition. The purpose of opportunity study
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is to arrive at a quick and inexpensive determination of salient facts of an
investment possibility.
B. Pre-Feasibility Studies

The project idea must be elaborated in 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, prior assessment of
the project's idea might be made in a pre-feasibility study. This helps to see if:

 All possible project alternatives are examined

 The project concept justifies detailed study,
 All aspects are critical and need in-depth investigation, and
 The project idea is viable and attractive or not.

A pre-feasibility study should be viewed as an intermediate stage between a

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,
however.

C. Support /Functional/ Studies

Support or functional studies cover aspects of an investment project, and
are required as prerequisites for, or in support of, pre-feasibility and
feasibility studies, particularly for large-scale investment proposals. This may
include:

 Market studies of products,

 Raw material and factory supply studies,
 Laboratory and pilot plant tests,
 Location studies,
 Environmental impact assessment,
 Economies of scale studies, and
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  Equipment selection studies

The contents of a support study vary, depending on the type and nature of
projects. However, as it relates to a vital aspect of the project, the
conclusions could be clear enough to give directions to the subsequent stage
of project preparation. In most cases, a support study when undertaken
either before or together with a feasibility study, form an integral part of the
latter and lessen its burden and cost.

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 D. Feasibility Studies

A feasibility study should provide all data necessary for an investment

decision. The commercial, technical, financial, economic, and environment
prerequisites for an investment project should, therefore, be defined,
refined, and critically examined based on alternative solutions already
reviewed in the pre- feasibility study.

The results of these efforts is then a project whose background

conditions and aims have been clearly defined in terms of its control
objective and possible marketing strategies, the possible market shares
that can be achieved, the corresponding production capacities, the plant
location, existing raw materials, appropriate technology and mechanical
equipment and, if required, an environmental impact assessment.

The financial part of the study covers the scope of the investment,
including the net working capital, the production and marketing costs,
sales revenue, and the return on capital invested. Final estimates on
investment and production costs and its subsequent calculations of
financial and economic profitability are only meaningful if the scope of the
project is defined unequivocally in order not to omit any essential part and
its related cost.

There is no uniform approach or pattern to cover all industrial projects of

whatever type, size, or category in such studies. The emphasis on the
components varies from project to project. For most industrial projects,
however, there is a broad format of general application – bearing in mind
that the larger the project the more complex will be the information
required.

Although feasibility studies are similar in content to pre-feasibility studies,

the industrial investment project must be worked out with the greatest

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accuracy in an iterative optimization process, with feedback and inter-
linkages, including the identification of commercial, technical, and
entrepreneurial risks.

The sensitive parameters such as the size of the market, the production
program, or the mechanical equipments selected should be examined
more closely. Moreover, a feasibility study should be carried out only if
the necessary financing facilities, as determined by the studies, can be
identified with a faire degree of accuracy.

There would be little sense in a feasibility study without the reliable

assurance that, in the event of positive study findings, funds could be
made available. For that reason, possible project financing must be
considered as early as the feasibility study stage, because financing
conditions have direct effects on total costs and, thus, on the financial
feasibility of the project.

E. Appraisal Report

When a feasibility study is completed, various parties will carry out their
own appraisal of the investment project in accordance with their individual
objectives and evaluation of expected risks, costs, and gains.

Large investment and development finance institutions have a formalized

project appraisal procedure and usually prepare appraisal reports. This is
the reason why project appraisal should be considered an independent
stage of the pre-investment phase, marked by the final investment and
financing decisions taken by the project promoters.

The appraisal report will prove whether the pre-production expenditures

spent since the initiation of the project idea were well spent or not. Project
appraisal as carried out by financial institutions concentrates on the health
of the company to be financed, the returns to be obtained by equity

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holders, and the protection of its creditors. The techniques applied to
appraise projects in line with these criteria center around technical,
commercial, market, managerial, organizational, financial, and, possibly,
socio-economic aspects.

2. The Investment/Implementation Phase

The investment or implementation phase of a project provides wide scope

for consultancy and engineering work, primarily in the field of project
management. The investment phase can be divided into the following
stages:

 Establishing the legal, financial, and organizational framework;

 Tendering, evaluation of bids, and negotiations;
 Technology acquisition and transfer;
 Detailed engineering design and contract, including tendering,
evaluation of bids, and negotiations;
 Acquisition of land, construction work, and installation;
 Pre-production marketing, including the securing of
supplies and suppliers and setting up the administration of
the firm;
 Recruitment and training of personnel; and
 Plant commissioning and start-up

Detailed engineering design comprises preparatory work for site

preparation, the final selection of construction planning and time
scheduling of factory construction, as well as the preparation of flow
charts, scale drawing, and a wide variety of layouts.

During the stage of tendering and evaluation of bids, it is especially

important to receive comprehensive tenders for goods and services for the
project from a sufficiently large number of national and international
suppliers of proven efficiency and with good delivery capacity.

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 Negotiations and contracting are concerned with the legal obligations
arising from the acquisition of technology, the construction of buildings,
the purchase and installation of machinery and equipment, and financing.
This stage covers the signing of contracts between the investor or
entrepreneur, on the one hand, and the financing institutions, consultants,
architects, and suppliers of raw materials and required inputs, on the other.

The construction stage involves site preparation, construction of

buildings and other civil works, together with the erection and installation
of equipment, in accordance with proper programming and scheduling.

The personnel recruitment and training stage, which should proceed

simultaneously with the construction stage, may prove very crucial for the
expected growth of productivity and efficiency in plant operations.

Of particular relevance is the timely initiation of marketing

arrangements to prepare the market for the new products (pre-
production marketing) and secure critical supplies (supply marketing).

Plant commissioning and start-up is usually a brief, but technically

critical, span in project implementation. It links the proceeding
construction phase and the following operational (production) phase.

In general, it is to be noted that in the pre-investment phase, the quality

and dependability of the project are more important than the time factor;
while in the
investment phase, the time factor is more critical in order to keep the
project within the forecast made in the feasibility study.

3. The Operating Phase

The problem of the operating phase needs to be considered from

both a short- and a long-term view point.

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The short-term view relates to the initial, after commencement of
production period, when a number of problems may arise concerning such
matters as the applications of production techniques, operation of
equipment, or inadequate labor productivity owing to lack of qualified staff
and labor. Most of these problems have their origin in the implementation
phase and hence, relatively easy to overcome as there is learning over time.

The long-term view relates to chosen strategies and the associated

production and marketing costs as well as sales revenues. These have
direct relationships with the projections made at the pre-investment phase.
If such strategies and projections prove faulty, any remedial measures will
not only be difficult but may prove highly expensive.
The given outline of the investment and operating phases of an
industrial project is undoubtedly an oversimplification for many projects,
and, in fact, certain other aspects maybe revealed that even have greater
short- term or long-term impacts.

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 The DEPSA’s Project Cycle
This model is developed in Ethiopia in 1990 by Development Projects
Studies Authority (called “The DEPSA’s Model”), which is nearly
identical with the UNIDO cycle, will be briefly discussed. There are various
ways in which the project cycle may be viewed and portrayed
depending on the purpose, emphasis, and detail required to illustrate.
According to the Guidelines to project planning in Ethiopia (1990) of
Development Project Studies Authority (DEPSA), the project cycle
comprises three major phases.

1. Pre - investment phase,

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 2. Investment phase, and
3. Operating phase

Each of these three phases may be divided into stages. The Guideline has
divided the above phases into six stages as follows:

1. Identification,
2. Preparation,
3. Appraisal/decision,
4. Implementation,
5. Operation, and
6. Ex-post evaluation

The pre-investment phase consists of the first three stages, while the
investment phase includes the fourth stage, and the operation phase
covers the last two stages.

A project cycle, in other words, means the various stages of information

gathering and decision-making, which take place between a project’s
inception and completion. In reality, these are somewhat artificial, but do
serve to emphasize the need to think of project planning as a process of
decision-making taking place over time.

Broadly speaking, what is important about this process is that it should

begin with the identification of a number of alternatives, suing (obtaining)
existing information, and gathering new data in such a way as to limit
alternatives under consideration to those few, which are most promising.
Throughout the project cycle, the primary preoccupation of the analyst is to
consider alternatives, evaluate them, and to make decisions as to which of
them should be advanced to the next stage.

In short, the project planning process is essentially a task of eliminating

less viable ideas and alternatives; and in the continuum, the planner
naturally hopes that the best alternative will emerge. In this process:

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  The results and/or outputs of a given stage serve as the input or
part of the input of the next stage, if it is decided to proceed to the
next stage;

 The output or part of the output of one stage may be used as

new input (feedback) to reconsider or revise, where necessary, the
results of proceeding stages; and
Most importantly, the results of the implementation, operation, and ex-
post evaluation stages of a project constitute valuable experience for the
preparation of subsequent projects, provided these inputs are systematically
documented and analyzed

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