Chapter one continued……….

THE PROJECT CYCLE

 To perform a project planning and management activity

effectively & efficiently we should know

 The natural sequence of project.

Projects of all type move from conception to reality .

The main features of this process are:

 Information and data gathering and analysis, and

 Making decision on the basis of the results of the
analysis.
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The project cycle concept aims to emphasis two main points:

Project development should pass through a series of consecutive

steps to help ensure that projects are well planned, properly
appraised, adequately resources and efficiently implemented;
and that
Lessons learned during implementation should be feed back into
the planning process to improve the design and implementation
of future initiatives.

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 A project cycle is a sequence of events, which a project follows.

 These events, stages or phases can be divided into several equally valid ways,
depending on the executing agency or parties involved.

 Some of these stages may overlap. There are various models that deal with the
project cycle.

1. Lockyer’s Four Phase Model

Lockyer describes a four phase model of the project process:

 Conception - assess the feasibility of the project

 Development - prepare the project plan

 Realisation - carry out the plan

 Termination - close the project

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 2. UNIDO PROJECT CYCLE
A. The Pre-Investment Phase: (Opportunity Study; Pre feasibility Study;
Feasibility Study; Appraisal)
B. Investment Phase: (Negotiation and Contracting; Engineering Design;
Construction; Pre production marketing; Recruitment and Training; etc.)
C. Operational/Normalization Phase: (Expansion and Innovation; Replacement
and Rehabilitation; Commissioning and Start-up)

A. PRE-INVESTMENT PHASE: The pre-investment phase includes project

activities such as:
Identification of investment opportunities that normally called
opportunity study.
Pre-feasibility study (Preliminary project selection and definition),
Feasibility study (Project formulation), and
Appraisal and Decision (Evaluation and investment decision), etc.
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 B. INVESTMENT PHASE

The investment phase includes project activities such as:

 Project and Engineering Design: It comprises of

 Designs of buildings and other facilities that include time

scheduling,

 Site prospecting and probing,

 Preparation of blue prints,

 Detailed plant engineering and

 A final selection of technology and equipment.

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 Negotiation and Contracting: It includes definition of
 The legal obligations in respect to project financing,
 Acquisition of technology,
 Construction of building and services, and
 Supply of machinery and equipment for the operation phase

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 Construction: It includes actual construction of building,
installation of machinery and manpower.
 It involves site preparation, construction of building and other
civil works together with the erection and installation of
equipment in accordance with proper programming and
scheduling.
 Recruitment and Training of Workers: It includes local and
abroad recruitment and training of workers for the smooth
running of operation.
 It should proceed simultaneously with the construction stage
and it may prove relevant to the rapid growth of productivity
and efficiency. 7
 Commissioning and Start up: It requires handover of the building to project
sponsor or promoter.
 Start up (delivery stage) is brief but technically critical span in project
development.
 Its success indicates the effectiveness of the planning and execution of the
project.
C. OPERATION PHASE: The operation phase includes project activities such as
expansion and innovation, replacement and rehabilitation, and commissioning and
start-up.
The issues in the operational phase need to be considered both from long and short-
term viewpoints.
i. The short-term view point relates to:
 Application of production
 Operation of Equipment 8
 ii. The long-term view point relates to :
 Production cost

 Income from sales, etc.

3. DPSA'S PROJECT CYCLE: According to the Guidelines to

Project Planning in Ethiopia (1990) of Development Project Studies
Authority (DEPSA), a project cycle comprises three major phase .

 Pre-investment
 Investment and
 Operation
Each of these three phases may be divided into stages. The guideline
has divided the cycle into 6 stages. 9
Each of these three phases may be divided into stages. The guideline has divided the cycle into 6
stages.

Identification
Preparation pre-investment phase
Appraisal/decision
Implementation investment phase

Operation Operation phase

Ex-post Evaluation

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Baum’s model of project cycle
Initiated by W. Baum in 1970, was improved in 1978 and has
been adopted by the World Bank ever since, initially recognized
four main stages. Evaluation was added in a later version in
1978, namely:
Five phases:
1. Identification (finding the project)
2. Preparation/analysis (Pre-feasibility and feasibility studies) (Does
it have merit?)
3. Appraisal (critical review, independent)
4. Implementation (getting it started)
5. Evaluation (success or failure) 11
 Capital expenditure decision is a complex decision process,
which may be divided into six broad phases:

A. Identification
B. Pre-feasibility Study
C. Feasibility (technical, financial, economic)
D. Selection and project design - Appraisal
E. Implementation
F. Ex-post evaluation

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13
I. Identification

 The first stage in the project cycle is to find potential projects.

 Identification of promising investment opportunities requires

imagination, sensitivity to environmental changes, and a realistic
assessment of what the firm can do.

This phase may take two forms:

 If the project is largely a private venture in a widely market

economy context the initiating entity will define the concept,
expectation and objectives of the project.
 The project idea can also emanate from government agencies in
the context of government development plans. 14
 In the latter case Sectoral information (i.e. the direct and indirect demands of

sectors) is an important Source of identification.

 In market economy context anticipated demand for the projects output is

important.

 In addition assessment of appropriate technology, scale of the project, timing of

the project etc. are important.

 All types of specialists’ input are required at this stage.

 The planning phase of a firm’s capital investment is concerned with

 The articulation of its broad investment strategy and

 The generation and preliminary screening of project proposal.

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 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
 Project ideas from government policy and plans

 The identification of project ideas is based on several aspects of development.

Need - a need assessment survey may show the need for intervention
Market demand - domestic or overseas
Resource availability - opportunity to make available resources more profitable
Technology - to make use of available technology
Natural calamity - intervention against natural calamity such as flood or
drought
Political considerations 16
 II. Project preparation and analysis phase
 Once project ideas have been identified the process of project
preparation and analysis starts.
 Project preparation must cover the full range of Market analysis,
Technical analysis, institutional, financial analysis, Socio-
economic analysis, Environmental analysis, Organization and
management analysis.
 Critical element of project preparation is identifying and comparing
technical and institutional alternatives for achieving the project’s
objectives.
 Resource endowment (labor or capital) would have to be
considered in the preparation of projects. 17
 Preparation thus require feasibility studies that identify and
prepare preliminary designs of technical and institutional
alternatives, compare their costs and benefits.

 It involves generally two steps:

 Pre-feasibility studies
 Feasibility studies

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 A. Pre-feasibility Study
 The identification process will give the background information
for defining the basic concept of the project, which leads to the
feasibility study stage.

 Once a project proposal is identified, it needs to be examined.

 To begin with, a preliminary project analysis is done.

 A prelude to the full blown feasibility study, this exercise is meant

to assess
I. Whether the project is prima facie worthwhile to justify a feasibility study and
II. What aspects of the project are critical to its variability and hence warrant an
in-depth investigation.
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 At the pre-feasibility study stage the analyst obtains
approximate valuation of the major components of the projects
costs and benefits.
 Availability of adequate market
 Project growth potential
 Investment costs, operational costs and distribution costs
 Demand and supply factors; and
 Social and environmental considerations.
At pre feasibility : All possible project alternatives are examined.
 The project concept justifies detail study.
 All aspects are critical and need in-depth investigation.
 The project idea is viable and attractive or not 20
If the project appear viable form this preliminary assessment the
analysis will be carried to the feasibly stage.

B. Feasibility Study
 The 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.
 If the preliminary screening suggests that the project is prima facie
worthwhile, a detailed analysis of the marketing, technical,
financial, economic, and ecological aspects will is undertaken.

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 The focus of this phase of capital budgeting is on gathering,
preparing, and summarizing relevant information about various
project proposals, which are being considered for inclusion in the
capital investment.
 Based on the information developed in this analysis, the stream of
costs and benefits associated with the project can be defined.
 At this stage a team of specialists (Scientists, engineers,
economists, sociologists) will need to work together.
 At this stage more accurate data need to be obtained and if the
project is viable it should proceed to the project design stage.

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The final product of this stage is a feasibility report. The
feasibility report should contain the following elements:

 Market analysis
 Technical analysis
 Organizational analysis
 Financial analysis
 Economic analysis
 Social analysis, and
 Environmental analysis

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The feasibility study would enable the project analyst to select the most likely
project out of several alternative projects. Selection follows, and often overlaps,
analysis.

This stage involves a systematic review of all aspects of the project in order that
decision can be made as to whether to proceed. The following aspects should be
covered in the appraisal process:

Technical-is the project design appropriate and will the project

work as expected?
Financial- has proper provision been made to cover the financial
requirements and obligations of the project?
Economic- is the project advantages form the point of view of the
economy as a whole?
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Social- is the project both advantageous and acceptable to the
people affected by it?
Institutional- are there suitable organizations in place to
implement and manage the project. Is the legal frame work
appropriate?

Environmental- have the environmental impacts of the project

been properly considered.
Sustainable- will the project be sustainable in the long term
both financially- and institutionally.

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 It is considered as an independent stage of the pre-investment
phase, marked by the final investment and financing decisions
taken by the project promoters, where various parties will handle
their own appraisal of the investment project in accordance with
their individual objectives and evaluation of expected risks, costs,
and gain.
It addresses the question - is the project worthwhile? Wide ranges
of appraisal criteria have been developed to judge the worthwhile of
a project.
They are divided into two broad categories, viz.,
 Non-discounting criteria and
 Discounting criteria.
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 To apply the various appraisal criteria suitable cut off values (hurdle
rate(minimum acceptable rate of return), target rate, and cost of capital)
have to be specified. The level of risk pursued influences these.

 Despite a wide range of tools and techniques for risk analysis (sensitivity
analysis, scenario analysis, Monte carol simulation, decision tree
analysis, portfolio theory, capital asset pricing model, and so on).

 Risk analysis remains the most intractable/difficult part of the project

evaluation exercise.

 This exercise also involves the undertaking of detailed engineering design;

manpower and administration requirement as well as marketing procedures
should be finalized.

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 Implementation
 After the project design is prepared negotiations with the funding
organization starts and once source of finance is secured
implementation follows.

 Implementation is the most important part of the project cycle.

 The better and more realistic the project plan is the more likely it is
that the plan can be carried out and the expected benefits realized.

 At the project implementation phase tenders are let and contracts

signed.

 Project implementation must be flexible since circumstances

change frequently. 28
 Project analysts generally 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.
 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:

I. Project and engineering designs,

II. Negotiations and contracting,
III. Construction
IV.Training, and
V. Plant commissioning.
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 Translating an investment proposal into a concrete project is a
complex, time consuming and risk fraught task.
 Delays in implementation, which are common, can lead to
substantial cost overrun.
2. Ex-post evaluation:
 The final phase of the project is the evaluation phase. Many
usually neglect this stage.
 The project analyst looks carefully at the successes and failures
in the project experience to learn how better to plan for the
future.
 In this stage it is important to examine the project plan and what
really happened.
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 Performance review should be done periodically to compare
actual performance with projected performance.

 A feedback device is useful in several ways:

a. It throws light on how realistic were the assumptions underlying

the project;
b. It provides a documented log of experience that is highly
valuable in future decision making;
c. It suggests corrective action to be taken in the light of actual
performance;
d. It helps in uncovering judgment biases;
e. It induces a desired caution among project sponsors.
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 Weakness and strengths should carefully be noted so as
to serve as important lessons for future project analysis
undertaking.
 Evaluation is not limited only to completed projects.
 Ongoing projects could also be evaluated to rectify
problems when the project is in trouble.
 The project management, the sponsoring agency, or other
bodies may do the evaluation.

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End!

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