CHAPTER 2

THE PROJECT CYCLE: MEANING AND MODELS

2.1. Project Cycle: Meaning

“What is a project cycle and why?”
 In order to answer this basic question, we need to see and understand the general features of project planning
and the identifiable tasks therein.
 In this regard, there tends to be a natural sequence in the way projects are planned and carried out.
 Before any project is actually realized, it goes through various planning phases.
 The different phases, through which a project passes, thus, constitute what is often called “the project cycle”.
 The main features of the project planning process (or the project cycle) are information gathering, analysis,
and decision-making.
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.
 The planning process does not contain such a stringent sequence of events since all the aspects of the project
have to be considered simultaneously and, if necessary, adjusted to one another.
 Therefore, a 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.
 And 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.
Regarding the classification of the aspects for purposes of project analysis and understanding,
 There are many equally valid ways in which the project cycle may be divided and the identifiable stages
may be described.
 There are alternative models that deal with the project cycle.
 However, in this text, and exclusively in this chapter, more emphasis will be given to two basic "Models"
that are well accredited as models of the project cycle and widely dealt in academic literatures.
 These are “The Baum’s Cycle (also called the World Bank Project Cycle)” and “The UNIDO
Project Cycle”.
 In addition to these two, a third model 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.
2.2. The Baum 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”.
ƒ In this regard, the first basic model was developed by Warren C. Baum in 1970, which was by then
adopted by the World Bank as a project cycle.
ƒ 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. Each of these stages
briefly discussed in the next paragraphs.
2.2.1. 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.
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.
2.2.2. Preparation
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 out come 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 that cover large areas
and have big budgets.
 2.2.3. 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 appraised 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:
a) Technical: here the appraisers concentrate in verifying whether what is proposed will work in the
way suggested or not.
b) 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.
c) 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.
d) 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.
e) Economic: the appraisers here try to see whether what is proposed is 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.
f) 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.
g) 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.
 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.
2.2.4. 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.
2.2.5. 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 of appraisal.
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.
ii. This emphasizes once again the need for careful attention to each of the seven aspects of projects.
iii. 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.
 2.2.6. Evaluation
The final phase in the project cycle is evaluation.

ƒ Once a project has been carried out, it is often useful, (though not always
done),
ƒ 9 To look back what took place in the past,
9 To compare actual progress with the plans, and
9 To judge whether the decisions and actions taken were responsible and useful.

ƒ The extent to which the objectives of a project are being realized provides the primary criterion for an
evaluation.
ƒ 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,

ƒ Project’s management unit often continuously evaluates its experience as implementation proceeds.

ƒ The sponsoring agency, perhaps, the operating ministry, the planning agency, or an external assistant
agency may undertake evaluation.
ƒ 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.
ƒ Evaluation can help not only in the management of the project after the initial phase, but also help in the
planning of future projects.
ƒ 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.
2.3. 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.
 2.3.1. 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);
 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 the pre-investment phase into 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, 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 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 a 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:

9 All possible project alternatives are examined,

9 The project concept justifies detailed study,

9 All aspects are critical and need in-depth investigation, and

9 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.
9 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
 Equipment selection studies
The contents of a support study vary, depending on the type and nature of projects.

9 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.
9 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.
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 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 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.
2.3.2. 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.
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.
2.3.3. The Operating Phase
The problem of the operating phase needs to be considered from both a short- and a long-term viewpoint.

ƒ 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.
9 Most of these problems have their origin in the implementation phase and hence, relatively easy to
overcome as there is learning over time.
ƒ The long-term view relates to chosen strategies and the associated production and marketing costs as well
as sales revenues.
9 These have direct relationships with the projections made at the pre-investment phase.

9 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.
2.4. The DEPSA’s Project Cycle
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,
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:
 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.
 Summary of the UNIDO Cycle

Pre-Feasibility Study and

Feasibility Study

Opportunity Study
(Market & Demand, Capacity,
Input, Techno, Location analysis)

Project Conception
Project Conception

Rejection
Rejection

Investment Phase Operating Phase Ex-Post Evaluation

Investment Phase Operating Phase Ex-Post Evaluation
Figure 1: Summary of UNIDO Cycle

Project Planning: Concepts, Analysis, Appraisal, and Implementation