Chapter Three: Project Identification

CHAPTER THREE

PROJECT IDENTIFICATION

3.1: Project Identification

Project identification is the process of searching for and subsequently finding potential projects
that might be realized to generate benefits in excess of costs that accrue to the society and
contribute towards the attainment of development objectives. The generation of promising
investment (and/or project) ideas is among the major stages in the project cycle. It is the first stage
in the project planning process.

Project identification is made in rather general terms with broader scope at the first glance and
then, the idea will be progressively developed. The search for promising project ideas is the first
step towards establishing a successful venture. The key to success lays in getting into the right
business at the right time. Project ideas generally should aim at overcoming meeting unsatisfied
needs/ demand for goods and services.

The prevailing constraints, needs, and demands should be interpreted broadly to include, for
instance, foreign exchange constraints that might indicate the need to undertake projects for export
promotion or import substitution. The variety of projects makes it impossible to prepare an
exhaustive list of sources from where project ideas emanate; but much depending on the experience
and imagination of those entrusted with the task of initiating development project.

As the traditional adage goes, the key to success lies in getting into the right business at the right
time. While this advice is simple, its accomplishment is difficult because good business
opportunities tend to be elusive. Identification of such opportunities requires imagination,
sensitivity to environmental changes, and realistic assessment of what the firm can do.

3.1.1, Who Identifies Projects?

There are quite large number of institutions and/or groups that often identify investment
opportunities (or generate project ideas) in the society depending on the type of project under
consideration. Projects might be identified by:

❖ Small producers’ organizations/producers’ unions

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❖ Large scale individual private sector producers

❖ Product marketing organizations
❖ Private sector companies (local/multinational)
❖ State owned enterprises & organizations
❖ Government ministries, authorities, agencies, and commissions
❖ Development banks
❖ International development agencies, aid agencies, and self-aid associations
❖ Local governments and state, regional, and sub-regional authorities
❖ Local political & pressure groups such as opposition parties
❖ Local and/or international NGOs
❖ Credit institutions (such as credit unions, savings and loan associations, saving banks,
commercial banks) and cooperatives; and so on.

3.2. Sources of Project Ideas

There are two major levels where project ideas are originated , the macro and micro level.

1, Macro Sources of Project Ideas

Project ideas often emanate from the following macro sources:

❖ National, sector or regional plans

❖ Constraints on the development process due to shortage of essential infrastructure facilities
❖ Government decisions 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 material, energy, transportation, etc.
❖ Unusual events such as droughts, floods, earthquake, hostilities, etc.
❖ Government decisions to create project-implementing capacity in such areas as
construction, etc.

Project ideas can also originate from multilateral or bilateral agreements, development agencies,
and as a result of regional or international agreements in which the nation participate.

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In developing countries, the government remains to be the major source of project ideas. The
following are presumed to be the major reasons for governments to be important sources of project
ideas in developing and/or underdeveloped nations:
❖ They often have the necessary resources for undertaking opportunity studies
❖ They do also have unlimited access to data and information
❖ They do have the required facilities to conduct survey, studies, and reviews.
Moreover, such governments are fully familiar with the development objectives, priorities, and
strategies.
2, Micro Sources of Project Ideas
Apart from the macro sources for generating project ideas, there are diverse kinds of institutions
and/or economic entities that are considered micro sources of project ideas.
The following are among the major micro sources of investment (or project ideas):
❖ Private and Public Enterprises ❖ Financial Institutions/Credit Associations
❖ Local Groups or Organizations ❖ Cooperatives, Farmers’ Unions, etc.
❖ Consumer Groups and Associations ❖ New Technology Suppliers and so on.
In general, project ideas that emanate from the micro-sources are obtained (and/or generated)
based on one or many of the following conditions:
❖ 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 or organizations to enhance their economic status and improve
their welfare.

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Moreover, the following techniques and/or procedures can be adopted in order to generate project
ideas from micro sources:

1, Availability of Raw Materials: Easy availability of good quality of raw materials at fair prices
is a definite indication that some projects that can make use of those raw materials may be through
of. For example, in an area where agriculture in the predominant activity and where agricultural
produces (like cereals, vegetables and fruits) are available in plenty, the potential can be made use
of by setting up food processing industries. Availability of minerals may give lead to chemical
industries.

2 Availability of skilled labor: Based on the locally available skilled labor force, suitable industries
that can make better use of the skilled manpower can be identified.

3 Analysis of the performance of existing industries; A study of existing industries in terms of

their profitability utilization can indicate promoting investment opportunities which are profitable
and relatively risk free. An examination of capacity utilization of various industries provides
information about the potential for further investments. Such study is more useful if it is done
region wise. Particularly for products which have high demand for consumption and wide scope
for production.

4 Examination of the input and outputs of various industries: The analysis of inputs required for
various industries may throw some project ideas. Opportunities exist when {1] Materials,
purchased parts, or supplies are presently procured from distance sources with considerable time
lag and transportation cost and [2] Several firms produce internally some components parts which
can be supplied at lower cost by a single producer who can enjoy economics 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 produce, by products as well as waste products.

5 Review of imports and exports; Analysis of import statistics for a period of five to seven years
is helpful in understanding the trend of imports of various goods and the potential for import
substitution. Also, an examination of export statistics is useful in learning about the export
possibilities of various products.

6 Investigation of local materials and resources; A search for project ideas may begin an
investigation into local resources and skills. Various ways of adding value to locally available

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materials may be examined. Similarly, the skills of local artisans may suggest products that might
be profitably produced and marketed. Such assessment may consider issues such as the human and
material resources, Infrastructure facilities and market for various products.

7 Analysis of economic and social changes: A study of economic and social trends is helpful in
projecting demands for various goods and services. Changing economic conditions and consumer
preferences provide new businesses opportunities.

8 Study of new technological developments: new products are the new process and technologies
for existing products developed by the research laboratories may be examined for profitable
communication.

During identification, the analyst should eliminate project proposals that:

❖ Are technically unsound and risky ❖ Are very costly in relation to benefits
❖ Have no market for the output ❖ Assume over ambitious sales and
❖ Have inadequate supply of inputs profitability, etc.

As a result, some of the project alternatives will be rejected and those that are promising will be
advanced to the next stage called project preparation.

3.3. 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
project identification report or project concept or profile. It might be part a more general sector or
regional planning exercise or the result of participatory approach at the village level by a district
officer. Whenever it is developed, it is essential to have a clear idea of what the proposed project
is supposed to be and what are the hopes to achieve. A project concept or profile should be short
and can sometimes be only a couple of pages. It should include answers to the questions;

1, Justification and Purpose

❖ 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?

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❖ What is the justification of the project?

❖ What demands, needs or opportunities is the project addressing?
❖ What are the main alternative ways for meeting the project’s objectives?
❖ What existing information sources were, or can be used, in identifying and developing the
project?

2, Beneficiaries and Stakeholders

❖ Who will benefit from the project?

❖ Who identified the project?
❖ Who has a share or stake in the project?
❖ Who will be positively, and negatively, affected by the project?
❖ How have project beneficiaries and other stakeholders participated in the identification of
the project?
❖ Which institutions are the targets of the project?

3, Resource and Institutions

❖ What potential resources may be available for implementing the project?

❖ Which organizations are to be involved in project planning and implementations?

4, Policies and Plans

❖ How does the project proposal fit into any sector or regional plans?
❖ Does the project fit into current policies?

5, 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?

6, Support: What is the level of political and administrative support for the project? And does the
project have the support of beneficiaries and/or local communities?

7, Risks: What are the chances of the project achieving its objective or what are the main risks
associated with the project?

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3.4, Prioritization and Ranking

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. At
the national level different agencies and divisions within ministries will have their own project
ideas and will have to compete for support and resources. To decide which projects to support, it
will be necessary to set prioritize. This calls for the ranking of projects. But how are projects to be
ranked, and who is to do this? A set of criteria against which project can be ranked needs to be
established; these criteria will vary depending upon the level of a project. Potential criteria for
ranking projects are given below.

1, Extent: Number of people and geographic area affected by the project

2, Economic and Financial: Potential economic benefits to the country or region and also to
farmers and local communities

3, Environmental: Conservation of natural resources and more sustainable land use or protection
of natural resources (e.g., forests)

4, Social: Poverty alleviation or assistance to disadvantaged groups

5, Policy: Is the project in line with national policies?

6, Resources: Availability of human resources to implement project and likely availability of

funding from government, NGO and/or donors

7, Success or Failures: What are the chances of the project successfully meeting its objectives?
Or What degrees of the risks are associated with the project that may affect its implementation?

8, Support: Political support for project and 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 is 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.

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