CHAPTER THREE

PROJECT IDENTIFICATION
3. 1 Pre-Identification
"Pre-identification" is an important preclude to project identification. This pre-identification
stage involves surveying, reviewing, inventorying, and analysis of strategies and policies, natural
resources data and socio-economic information. It is a very important phase in project planning.
Unfortunately, it is an aspect of planning, which is either, almost totally ignored or for which
inadequate resources are provided in most developing countries.

There are a number of reasons:

 First, and perhaps most important of all, is sheer ignorance - an ignorance of need and
ignorance of cost-effective ways of carrying the research, surveys, inventorying of
resources and integrating and analyzing the information.
 Second, such work tends to be regarded as an expensive overhead cost and therefore,
expendable in difficult times of budgetary.
 Third, a lot of the work has tended to be time consuming, people cannot wait for results
and do not consider it important to even start it.

Nowadays, modern technology is revolutionizing the survey methods and the mean for carrying
out synthesis and analysis, speeding up some processes, reducing the costs of others, and
providing new ways of looking at things.

A good idea being a prerequisite to sound project formulation and the analysis of data identifying
gaps and throwing up ideas for possible projects, project identification must be carried out also
with in a framework of national, regional and sectoral development (including pricing, taxation
and subsidy) policies. Otherwise, much time and effort might be wasted in identifying and
preparing projects which would be reflected on policy grounds or which might turnout to be
unfeasible because of, for example, a tax and subsidy policy.

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Thus, those who are responsible for identifying projects need to be aware of accepted strategies
and policies and also be in a position to feedback information to those who are responsible for
formulating policies.

3.2 Project Identification

The search for promising project ideas is the first step towards establishing a successful venture.
The key to success lies in getting into the right business at the right time. The objective is to
identify investment opportunities, which are prima facie feasible and promising and which merit
further examination and appraisal.

Project identification is the first stage in project cycle. It should be a response to a readily
apparent community need or deficiency in the development of local environment. Project
identification is concerned with the collection, compilation and analysis of economic data to
locate possible opportunities. Project ideas are often resulted from the identification of
unsatisfied community demands or needs and possible means to meet them; problems or
constraints in the development process caused by shortages of essential facilities and materials
and human resources, unutilized or underutilized materials and human resources and
opportunities for the conversion to more productive purposes and the need to complement other
investment.
Project identification consists in finding projects, which could contribute towards achieving
specified development objectives. In principle, project identification should be an integral part of
the macro-planning exercise, with sectoral information and strategies as the main source of
project ideas.

Sources of Project Ideas

Project identification stage:
 Should include all individuals or groups that will be potentially involved in project
implementation such as local officials, business leaders, institutional leaders and other
identified as potential partners or recipient.
 It is important to include all of the stakeholders at this stage so as to encourage collaboration

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 It is to be careful ( reduce risk and un certainty ) by considering a broad range of alternative
projects that will achieve the programs
 Effective project identification should set broad criteria and analyze the projects to determine
if further consideration is necessary.
In practice, however, projects do not always derive from national and sectoral plans. Instead,
they may originate from several sources. Irrespective of their origin, project ideas should, in
general, ail at overcoming constraints on the national development effort, be they material,
human or institutional constraints, or at meeting unsatisfied needs, and demand for goods and
services.

Constraints, needs and demand should be interpreted broadly to include, for example foreign
exchange constraints that might indicate the need to undertake projects for export promotion or
import substitution.

The variety projects make it impossible to prepare an exhaustive list of sources from where
project ideas emanate; much depend on the experience and imaginative of those entrusted with
the task of initiating development project.
In project identification stimulating the flow of ideas is very essential since most firms adopt a
very casual and random approach to the generation of project ideas. To stimulate the flow of
project ideas, the following are helpful:

 SWOT Analysis: SWOT is an acronym for strengths, weaknesses, opportunities, and

threats. SWOT Analysis represents a conscious, deliberate, and systematic effort by an
organization to identify opportunities that can be profitably exploited by it. Periodic SWOT
analysis facilitates the generation of project ideas.
 Clear Articulation of Objectives: Operational objectives of a firm may be one or more of the
following:
o Cost reduction
o Productivity improvement
o Increase in capacity utilization
o Improvement in contribution margin etc.

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A clear articulation and prioritization of objectives helps in channeling the efforts of employees
and stimulate them to think more imaginatively.
 Monitoring the Environment
The important aspects studied in monitoring the key sectors of the environment are as follows:
 Economic Sector
- State of the economy
- Overall rate of growth
- Cyclical fluctuations
- Linkage with the world economy
- Balance of payment situation
 Governmental sector
- Industrial policy
- Government programs and projects
- Tax framework
- Subsidies, incentives
- Import and export policies
- Monitory policy
 Technological Sector
- Emergence of new technologies
- Access to technical know-how, foreign as well as indigenous
- Receptiveness on the part of industry
 Socio-demographic sector
- Population trends
- Age shifts in population
- Income distribution
- Educational profile
- Attitudes toward consumption and investment
 Competition Sector
- Number of firms in the industry and market share of the dominant firms
- Degree of homogeneity and differentiation among products
- Entry barriers

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 - Comparison with substitutes in terms of quality, price, functional performance, etc
- Marketing policies and practices
 Supplier Sector
-Availability and cost of raw materials and sub-assemblies
-Availability and cost of energy
-Availability and cost of money

 Corporate Appraisal
Important aspects to be considered under this are:
 Marketing and distribution
- Market image
- Product line
- Market share
- Distribution network
- Customer loyalty
 Production and Development
- Condition and capacity of plant and machinery
- Degree of vertical integration
- Location advantage
- Cost structure
 Research and development
- Research capabilities of the firm
- Track record of new product developments
- Laboratories and testing facilities
- Coordination between research and operations
 Corporate resources and personnel
- Corporate image
- Dynamism of top management
- Competence and commitment of employees
- State of industrial relations
 Finance and Accounting

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 - Financial leverage and borrowing capacity
- Cost of capital
- Tax situation
- Accounting and control system
- Cash flows and liquidity
 Fostering a Conducive Climate: To tap the creativity of people and to harness their
entrepreneual urges, a conducive organizational climate has to be fostered.
In general, one can distinguish two levels from where project ideas are born: the macro-
level & the micro-level.
A. Macro-Level project Ideas
At the macro-level, project ideas emerge from:
 National policies, strategies & priorities as may be enunciated by government from time
to time;
 National, sectoral, sub-sectoral or regional plans and strategies supplemented by special
studies, sometimes called opportunity studies, conducted with the explicit aim of
translation of national and sectoral, sub-sectoral and regional programs into specific
projects;
 General surveys, resource potential surveys, regional studies, master plan and statistical
publications, which indicate directly or indirectly investment opportunities.
 Constraints on the development process due to shortage of essential infrastructure
facilities, problems in the balances of payments, etc.
 Government decision to correct social and regional inequalities or to satisfy basic needs
of the people through development projects.
 A possible external threat that necessitates projects aiming at achieving, for example,
self-sufficiency in basic materials, energy, transportation, etc.
 Unusual events such as droughts, floods, earthquakes, hostilities, etc.
 Government decisions to create project-implementing capacity in such area as
construction etc.
 At the macro-level, project ideas can also originate from multilateral or bilateral
development agencies & as a result of regional and international agreements in which the
country participate.

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  In addition, individual inspiration, institutions, workshops, and development experiences
of other countries may point to some interesting project ideas.

B. Micro-Level of project Ideas

At the micro-level, the variety of sources is equally broad. Project ideas emanate from:
 The identification of unsatisfied demand or needs.
 The existence of unused or underutilized natural or human resources and the perception of
opportunities for their efficient use.
 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
 The necessity to complement or expand investments previously undertaken;
 The desire of local groups/organizations to enhance their economic status & improve their
welfare;
 Analyze the performance of existing industries;
 Examine the inputs and outputs of various industries;
 Review imports and exports;
 Look at the suggestions of financial institutions and development agencies;
 Investigate local materials and resources;
 Analyze Economic and Social Trends; (value of time, leisure and recreational activities)
 Study new Technological Developments;
 Raw clues from consumption abroad; (new for the local but well-known abroad)
 Explore the possibility of reviving sick units of the industry;
 Attend Trade fairs;
 Project Proposals could also originate from foreign firms either in response to government
investment incentives or because they consider production within the country a better way to
secure a substantial share of the domestic market for their products.
The identification of investment opportunities is the starting point in a series of investment-
related activities, when potential investors (public or private) are interested in obtaining
information on newly identified viable investment opportunities.

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The main instrument used to quantify the parameters, information and data required to develop a
project idea into a proposal is the opportunity study, which should analyze or study the different
factors, or sources of project ideas that are listed above.
Opportunity studies could be area studies designed to identify opportunities on a given area
(Administrative province, backward region), 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.
Opportunity study is with the general objective of highlighting the principal investment aspect of
a possible industrial proposition to arrive at a quick and inexpensive determination of salient
facts of an investment possibility.
3.3 Screening potentially promising ideas
Once a list of project ideas has been put forward, the first step is to select one or more of them as
potentially promising. This calls for a quick preliminary screening by experienced professionals
who could also modify some of the proposals. At this stage, the screening criteria are vague and
rough, that becomes specific and refined as project planning advances.
During the preliminary screening to eliminate ideas, which are not promising at first sight, it is
required to look into aspects such as:
 Compatibility with the promoter
 Consistency with government priorities
 Availability of inputs
 Adequacy of market
 Reasonableness of costs
 Acceptability of risk level
 Compatibility With The promoter
The idea must be compatible with the interest, personality, and resources of the project promoter.
A real opportunity may fulfill the following three characteristics:
1. It fits the personality of the r / entrepreneur;
2. It is accessible to the promoter/ entrepreneur; and
3. It provides the prospect of rapid growth and high return on invested capital.

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  Consistency With Government Priorities
The project idea must be feasible given the national goals and governmental regulatory
framework. You may need to ask your self: Is the project consistent with national goals and
priorities? Is there any environmental effect contrary to governmental regulations? Can the
foreign exchange requirement of the project be easily accommodated? and etc.
 Availability of Inputs
The resources and inputs required for the project must be reasonably assured. To assess this, the
following questions need to be answered:
 Are the capital requirements of the project with in 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?
 Adequacy of the Market
The size of the present market must fit the prospect of adequate sales volume in the future.
Further, there should be a potential for growth and a 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 shares.
 Export markets.
 Analyze price profile of the product such as competitive product.
 Sales and distribution system.
 Projected increase in consumption.
 Barriers to the entry of new units.
 Economic, social and demographic trends favorable to increased consumption.
 Patent protection.
 Reasonableness of cost
The cost structure of the proposed project must enable to realize an acceptable profit with a
price. The following points should be reminded in this regard:
 Cost of material inputs
 Labor costs
 Factory overheads

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  General administration costs
 Selling and distribution costs
 Service costs
 Economies of scale

 Acceptability of Risk Level

The desirability of a project is critically dependent on the risk characterizing it. It deals with
whether the risk elements of the project are taken into consideration while designing the new
profitable projects.
During preliminary selection, 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.
Obviously, since the criteria tend to be somewhat nebulous, much depends on the experience and
sense of objectivity of the professionals applying them. It is, however, necessary to conduct this
screening, even with indistinct criteria, in order to reduce to a manageable number the project
alternatives to which more work and time will be devoted. Indeed, project planning can be
viewed as a process of elimination, i.e. elimination of interior alternatives.

As a result of the preliminary screening exercise, a project profile, an opportunity study report, or
an identification study report, as appropriate, is prepared showing which project alternatives
should be rejected and which ones may be advanced to the next stage.

During preliminary selection, 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.

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