Chapter 3
The Project Cycle
project cycle
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.
project cycle …
Capital expenditure decision is a complex
decision process, which may be divided into six
broad phases:
1. Identification
2. Pre-feasibility Study
3. Feasibility (technical, financial, economic)
4. Selection and project design
5. Implementation
6. Ex-post evaluation
project cycle …
Identification
Pre-feasibility
Ex-post study
evaluation
Feasibility study
Implementation
Appraisal
3.1 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.
Identification…
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.
Identification…
Ifthe project idea emanate form
government agencies in the context of
government development plans, in this
case
sectoral information (i.e. the direct and
indirect demands of sectors) is an
important source of identification
Identification…
In general there are four major sources from
which ideas or suggestions for project may
come:
1. Project ideas from technical specialists
2. Project ideas from local leaders
3. Project ideas from entrepreneurs
4. Project ideas from government policy and
plans
Identification…
At identification stage there could be a
number of alternatives that could be
examined.
Some of these projects may appear for
reasons nothing to do with the national plan.
In such circumstances it is advantageous to
understand the ‘political history’ of the
project.
Identification…
Theidentification 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
Identification…
Technology - to make use of available
technology
Natural calamity - intervention against
natural calamity such as flood or drought
Political considerations
Possiblealternative project must be
adequately assessed.
3.2 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 technical, institutional, economic,
and financial conditions necessary to
achieve the project’s objective.
preparation and analysis
phase…
Critical element of project preparation is
identifying and comparing technical and
institutional alternatives for achieving the
project’s objectives
Different alternatives may be available and
therefore, resource endowment (labor or
capital) would have to be considered in the
preparation of projects.
preparation and analysis
phase…
Preparation thus require feasibility
studies that identify and prepare
preliminary designs of
technical and institutional alternatives,
compare their costs and benefits, and
investigate in more details the more
promising alternatives until the most
satisfactory solution is finally worked out.
preparation and analysis
phase…
preparation and analysis phase
involves generally two steps:
Pre-feasibility studies
Feasibility studies
3.2.1 Pre-
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.
Pre--feasibility Study…
Pre
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.
Pre--feasibility Study…
Pre
At the pre-feasibility study stage the analyst
obtains
approximate valuation of the major
components of the projects costs and
benefits.
Pre--feasibility Study…
Pre
Some of the main components examined
during the pre-feasibility study include:
Availability of adequate market
Project growth potential
Investment costs, operational cost and
distribution costs
Demand and supply factors; and
Social and environmental considerations
Pre--feasibility Study…
Pre
Using this preliminary data supplied by the
various discipline specialists, a preliminary
financial and economic analysis will be
conducted.
If the project appear viable from this
preliminary assessment, the analysis will be
carried to the feasibly stage.
3.2.2. 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.
Feasibility Study…
If
the preliminary screening suggests
that the project is prima facie
worthwhile, a detailed analysis of
themarketing, technical, financial,
economic, and ecological aspects will be
undertaken.
Feasibility Study…
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.
The final product of this stage is a feasibility
report.
Feasibility Study…
The feasibility report should contain the
following elements:
Market analysis
Technical analysis
Organizational analysis
Financial analysis
Economic analysis
Social analysis, and
Environmental analysis
3.3 Appraisal
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.
Appraisal…
It addresses the question - is the project
worthwhile?
Wide ranges of appraisal criteria have been
developed to judge the worthwhile of a
project.
Appraisal…
They are divided into two broad categories,
viz.,
non-discounting criteria and
discounting criteria.
• To apply the various appraisal criteria suitable
cut off values have to be specified.
Appraisal…
The level of risk pursued influences these.
riskanalysis remains the most intractable
part of the project evaluation exercise.
Thisexercise also involves the undertaking
of detailed engineering design; manpower
and administration requirement as well as
marketing procedures should be finalized.
3.4 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.
Implementation…
Thebetter and more realistic the project
plan is
the more likely it is that the plan can
be carried out and the expected benefits
realized.
Implementation…
Atthe project implementation phase
tenders are let and contracts signed.
Projectimplementation must be flexible
since circumstances change frequently.
Implementation…
Technical changes are almost inevitable as the
project progresses;
price changes may necessitate adjustments
to input and output;
political environment may change
Implementation…
Project analysts generally divide the
implementation phase into three time periods.
1. the investment phase, where the major
investments are made. This may extend
from three to five years.
2. ·the development phase, which may also
extend from three to five years.
3. ·the project life
Implementation…
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.
3.5 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.
Ex--post evaluation…
Ex
In this stage it is important to examine the
project plan and what really happened.
Performance review should be done
periodically to compare actual
performance with projected performance.
Ex--post evaluation…
Ex
A feedback device is useful in several ways:
(i) it throws light on how realistic were the
assumptions underlying the project;
(i) it provides a documented log of experience
that is highly valuable in future decision
making;
Ex--post evaluation…
Ex
(iii) it suggests corrective action to be taken in
the light of actual performance;
(iv) it helps in uncovering judgment biases;
(v) it induces a desired caution among project
sponsors.
Weakness and strengths should
carefully be noted so as to serve as
important lessons for future project
analysis undertaking.
Ex--post evaluation…
Ex
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.