Development Planning and

Project Analysis II

Chapter One
Basic Concepts

By: Mulugeta Fekadu AMU, 2023

 Outline
1. Basic Concepts
1.1. The Project Concept
1.1.1. Definition
1.1.2. The Basic Characteristics of a Project
1.1.3. Classification of Project
1.1.4. Link Between Policy, Development Plan and Projects
1.2. The Project Cycle: Stages of Project Planning
1.2.1. Project identifications stage
1.2.2. Project preparation and analysis stage
1.2.2.1. Aspects of Project Analysis
1.2.3. Project appraisal stage
1.2.4. Project implementation stage
1.2.5. Evaluation And Supervision

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 1. Introduction
1.1. The Project Concept
 1.1.1.Definition

 A project is a proposal for an investment to create, expand or develop

certain facilities during a certain period of time.

 It is a group of tasks performed in a definable time period in order to

meet a specific set of objectives.

 It is a complex set of activities where resources used in expectation of

return and ruled by planning, financing & implementing as a unit.

 Projects usually have well defined sequence of investment &

production activities, and a specific group of benefits.

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 1.1.2. Basic Characteristics of a Project

 Projects should be formulated within the framework of the country’s

development priorities which may include growth, improving income
distribution, eradicating poverty and malnutrition etc.
 Projects may be share these common characteristics:
• It needs investment of resources to generate future benefits.
• There are measurable objectives of a project.
• A project is the smallest operational element unit.
• Uncertainty and risk is inherent in any project.
• It has a scope that grouped into definable tasks.
• It may require the use of multiple resources.
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 1.1.3. Classification of Projects
 Each project has it’s particular features which makes it unique:
• Scope: It explains the boundaries of the project, establishes
responsibilities for each team member and sets up procedures for how
completed work will be verified and approved.
• Extent of a project goals, cost & tasks to be done.
• Size: It used to quantify overall "extent" of the project effort, usually
accounting for duration, cost, complexity, staffing requirements and
related parameters. Example: (small, medium or large).
• Duration: Is the total amount of time it takes to finish a project,
which you measure in business days, hours, weeks, or months.
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 Cont’d…

• Outcome: Is the changes that occur as a result of your project or

actions. The output of projects may be goods, services or knowledge.
• Coverage: Is the amount or extent to which the project benefit
covered. It can be regional, national, international, urban, and/or rural.
• Type: Is category of projects based on product of project. It may be
agricultural, industrial, transportation, commerce etc.
• Input use: are those things that we use in the project to implement it.
It may be capital intensive, labor intensive, and/or energy intensive.
• Budget: The sum of money allocated for a project and should be self-
contained.
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 Cont’d…
I. Agricultural project: It focuses on raising productivity; helping farmers
reach markets; reducing risk; & making agriculture env’t sustainable.
II. Industrial Project: Processing raw materials & produce valuable goods
to satisfy society’s material needs and creating wealth.
III. Construction project: It is organized process of constructing,
renovating, refurbishing a building structure or infrastructure.
IV. Manufacturing project: It is an operation designed to produce large
and specialized products like defense weapons & aircraft carriers.
V. Research projects: It is used to confirm facts, solve new or existing
problems, support theorems, or develop new theories.
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 Cont’d…
 In each type of project we should answer the following questions:
• What is the major objective of the project?
• What is the basis for the demand of output of the project?
• What problem/opportunity is the project addressing?
• How does the project contribute to the wider goals of the sector?
• What alternative ways of addressing problem have been considered?
• What Strategy to be followed & actions to be taken to reach the aims?
• Why is the project most appropriate way of addressing the problem?
• What is the cost and time schedules of the project?
• Who are the major stakeholders & beneficiaries of a project?
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 Cont’d…
• Which institution is most appropriate for execution?
• Are there special situation relevant to the project?
 To determine the type of project, the decision making process could
include both the public and the private sectors.
 In the public sector, there will be a political context in which policies
and development plans are set.
 In the corporate decision-making, there are corporate strategic plans,
which include the vision, objectives, strategies and periodic plans.
 There is a need for projects, as the cutting edges for converting ideas
plans into actions, achieving objectives and bringing changes.
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 1.2. The Project Cycle: Stages of Project Planning

 Project cycle is various stages of information gathering and decision

making apply b/n project inception & completion.

 Project cycle is a sequence of events which a project follows.

 All stages are equally valid, and the process is flexible and making a
mistake at any stage is equally terrible.

 It is a group work people involves from different disciplines.

 Throughout the project cycle, the concern of the analyst is to consider

alternatives, evaluate them, and to make decision to the next stage.

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 1.2.1. Project Identification Stage
A. Project Concept Definition Phase
 This stage is possibly the most crucial in the project cycle, since
‘project ideas’ are first generated at this point.

 This phase essentially aims at expressing the country’s development

objectives in the form of projects.
 These sector‐ wide surveys provide a more reasonable basis for
assessment of priorities and developing project ideas for the later task.

 The survey examines the role of the project against the background of
the country’s development objectives and the way being pursued.

 Project ideas can emanate from a variety of sources.

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 Cont’d…
 At the macro level, project ideas can be emerge from:
• National policies, strategies and priorities
• National, sectoral, or regional plans and strategies

• General survey, resource potential survey, regional study,

• Constraints on the development process due to low facilities

• Government decision to correct social & regional inequality

• A achieving, self-sufficiency in materials, energy, transport

• Unusual events like draughts, floods, earth-quake

• Government decision to create project implement capacity
• Originate from multilateral or bilateral development agencies
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 Cont’d…
 At the micro level Project ideas may be emanate from:
• The identification of unsatisfied demand or needs

• The existence of underutilized natural or human resources

• The need to remove shortages in basic material services

• The initiative of enterprises in due to incentives provided

• The necessity to balance or expand previous investments

• The desire of local groups or to enhance their improve their welfare

• Foreign firms in response to government investment incentives

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 B. Project Investigation Phase

 It is an examination to find potential project ideas.

 It is the identification of investment opportunities.

 It develops the project idea to the point where a decision can be taken
on whether resources should be committed for further action.

 This stage should identify a number of alternatives using the existing

data to limit alternatives and to choose the most promising project.

 Hence, the project evaluation process is the essential way of

eliminating relatively less worthy ones.

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 Cont’d…

 The major steps in the identification process consist of :

• Evaluation of the current situation: Evaluating development

potential and identifies the constraints to the proposed development.

• Identifying policy issues: Examining the current policies &

assessment of their impact on the proposed project.

• Establishing the project’s rationale: It provides overall justification

for the country and for the lending institution to support it.

• Developing the project’s design and concept: It consists of setting

project’s objectives and identifying the project’s main components.

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 Cont’d…

• Setting the project’s scale: It should establish the rough order of

magnitude of the project, in respect of physical coordinates.

• Preparing preliminary cost & benefit estimates: Rough estimation

of the project’s total costs and benefits, the major project components.

• Proposing the organization and management structure: It is

proposing the project staff and organizational structure.

• Spelling out the further work requirement: It studies detailed

project preparation work and specific responsibility assigned for
various tasks.

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 1.2.2. Project Preparation and Analysis Stage

 Once project ideas have been identified and selected for further
examination, the process of project preparation and analysis starts.

 Element of project preparation is identifying and comparing technical

& institutional alternatives for achieving project’s objectives.

 It require feasibility studies that identify and prepare preliminary

designs of technical alternatives, compare their costs and benefits.

 It involves generally three steps: Pre-feasibility studies, Feasibility

studies and Support studies.

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 A. Pre-feasibility Study Phase

 It is preface to the full feasibility study; this is meant to assess:

• Whether the project is prima facie useful to justify a feasibility study;

• What aspects of the project are critical to its variability and hence
warrant an in depth investigation.

 During preliminary selection, the analyst should eliminate project

proposals that are technically unsound and risky.

 Some kind of preliminary screening is required to eliminate ideas,

which prima facie, are not promising.

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 Cont’d…

 For this purpose the following aspects may be looked into:

• Compatibility with the promoter

• Consistency with government priorities

• Availability of inputs

• Adequacy of market

• Reasonableness of cost, and

• Acceptability of risk level

 As a result of an opportunity study report which project alternatives

should be rejected and which ones may be advanced to the next stage.
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 B. Feasibility Study Phase

 The difference between pre-feasibility and feasibility studies is the

amount of work required to determine a project is to be viable or not.

 If the project is promising, a detailed analysis of marketing, technical,

financial, economic, and ecological aspects is undertaken.

 It provides a comprehensive review of all aspects of the project and

lays the foundation for implementing & evaluating the project.

 At this stage more accurate data needed and if the project is viable it
should proceed to the project design stage.

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 Cont’d…
 The feasibility report should contain the following elements:
• Demand and Market analysis
• Financial analysis
• Economic analysis,
• Technical analysis
• Organizational analysis
• Social analysis, and
• Environmental analysis.

 The feasibility study would enable project analyst to

select the most likely project out of several21
 C. Support Studies Phase

 Support studies cover specific aspects of an investment project, and

are required as basics for feasibility studies of investment proposals.

 The viability of which critically depends upon the quantity and quality
of certain input or aspect of that project.

 This is justified when a detailed study required for a specific aspect is

too involved to be undertaken as part of the feasibility study.

 The decision towards undertaking a feasibility study could be

dependent upon the outcome of a support study.

 Example: Raw materials for cement processing industries.

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 1.2.2.1. Aspects of Project Analysis
 Introduction
 The feasibility study would enable project analyst to select the most
likely project out of several alternative projects.

 If the project is promising, a detailed analysis of marketing, technical,

financial, economic & ecological aspects undertaken.

 Feasibility study provides a comprehensive review of all aspects of a

project and lays foundation for implementing & evaluating a project.

 It serves to establish a project’s technical and institutional feasibility,

whether it is fit with strategy & socio economic context for the
project.
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 I. Demand and Market Analysis

 It is conducted to know about the aggregate demand for the product or

service and the market share that the proposed project will enjoy.
 The primary task is to identify the need and estimate the nominal and
effective demand of the forecasted project product or service.
 If the product is a public good or private good, the task may be to
undertake social and institutional need assessment.
 Market analysis is basically concerned with these questions:
• What is the product for which feasibility study is to be undertaken?
• What would be aggregate demand of the proposed product in future?
• What would be the market share of the project under appraisal?
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 Cont’d…

• What is the ongoing and competitive selling price?

• Will the realization of the project affect the selling price of product?
• What are the marketing strategies that enable the firm to enter into a
market and capture adequate market size?
 To answer the above questions the project analyst requires a wide
variety of information and appropriate forecasting methods.
 The kinds of information required include the following.
• Consumption trends in the past and the present consumption levels
• Past and present supply positions
• Production possibilities and constraints
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 Cont’d…

• Imports and exports

• Structure and competition
• Cost structure
• Elasticity of demand
• Consumer behaviour, intentions, attitudes, preferences, and
requirements
• Distribution channels and marketing policies in use
• Administrative, technical, and legal constraints.
Example: Demand analysis by economist (-ve) and marketer (+ve) on
bare foot people’s of island.
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 II. Technical Analysis

 It involves defining the requirements for materials and utilities,

specifying their properties and setting up a supply channel.

 Address issues related to:

• Project design and processes: To ensure suitable technology and eng.

work it must evaluate alternative technologies & equipments.

• The input-output relationship: It may include the works of engineers,

soil scientists and agronomists in case of, say, agricultural projects.

 It concerned with the projects inputs (supplies) and outputs of real

goods and services and the technology of production and processing.

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 Cont’d…

 In general the technical analysis is primarily concerned with:

A. Materials and inputs Aspects: Identify the required types of inputs,

their sources and assessment of alternative types of inputs supply.

B. Location and Site Aspects: The choice of suitable location for the
project should be made from wide geographical area alternatives.

C. Engineering and Technology Aspect: Designing production layout

suitable for manufacturing the products defined in accordance with
the marketing concept, and in the qualities and quantities required.

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 III. Organizational Analysis

 Organizational analysis is the process of appraising the growth,

personnel, operations, and work environment of a project.

 The organizational structure should be determined in accordance with

the corporate strategies and policies. Basic issues to be addressed:

A. Organization & Management: Operational functions and activities

are structured and assigned to organizational units (marketing,
supply, production & administration).

B. Human Resource: The successful implementation of any project

needs staff and worker with sufficient skills and experiences.

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 Cont’d…
C. Overhead Costs: It could be categorized into the following:
 Factory overheads: costs that accrue in conjunction with the
transformation, fabrication or extraction of raw materials.

 Administrative Expenses: These are cost elements such as

management, bookkeeping and accounting, legal services and patents.

• Marketing overhead Costs: Wages & salaries, office supplies, utilities,

communication, indirect marketing costs, advertising, training etc.

• Depreciation Costs: Distributing the initial investment costs of fixed

assets over the lifetime.
• Financial Costs: Financial costs such as interest on long-term loans.
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 IV. Financial Analysis

 The primary purpose is to evaluate the project's profitability or cost-

effectiveness relative to some alternative project or investment.

 Frequently, the results of the financial analysis are used to compare

alternative projects to select which ones should be implemented.

 It seeks to ascertain the proposed project will be financially viable to

meet servicing debt and satisfy the return expectations of investors.

 By examining the financial implications for different parties the

analysts need to identify the projects financial efficiency, incentive
impact to the participants , credit worthiness and liquidity.

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 Cont’d…
 The aspects looked into while conducting financial appraisal are:
• Investment outlay and costs of the project
• Means of financing

• Cost of capital

• Projected profitability

• Break-even point

• Cash flows of the project

• Investment worthiness judged in terms of criteria of merit

• Projected financial position
• Level of financial risk
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 V. Economic Analysis

 It aims to ensure that scarce resources are allocated efficiently, and

investment brings benefits to a country & raises welfare of its citizens.

 And hence the committing of scares resources, by justifying the

significance of the project from the whole economy point of view.

 The focus is on the social costs and benefits of a project, which may
often be different from its monetary costs, and benefits.

 The financial analysis views form the participants (or owners) point of
view, while the economic analysis from the whole economy or
society’s point of view.

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 VI. Social Analysis

 It is a process that aims to identify the social dimensions of projects,

as well as analyze the different stakeholder perspectives and priorities.

 It allows the promoter to understand the opportunities and constraints,

and the likely social impacts associated with a project.

 It also provides spaces to incorporate:

• Stakeholders' views,

• Establish participatory processes and

• Inform the design of strategies for inclusion, cohesion and

accountability.
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 Cont’d…

 Project analysts are expected to examine the social issues related to:

• The attitude and the likely response of the beneficiary groups;

• The existence of potential capacities within communities;

• The cultural factors related to execution & outcomes of the project;

• Income distribution implications of the project;

• Employment creation which can affect income distribution;

• Issues of balanced regional development;

• The displacement impact of the project;

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 VII. Environmental Analysis

 It is a process to identify all the external and internal elements, which

can affect the project performance and its externalities.

 It should be done for major projects, which have significant ecological

implications like power plants and irrigation schemes, and
environmental polluting industries.

 The key questions raised in ecological analysis are:

• What is the likely damage caused by the project to the environment?

• What is the cost of restoration measures required to ensure that the

damage to the environment is contained within acceptable limits?

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 1.2.3. Project Appraisal Stage

 Project appraisal is the process of assessing the viability of a project.

 It is an independent assessment of the project feasibility by

professionals to identify the weaknesses and strengths of the study to
make investment decision.

 It is a systematic and structured approach to evaluating the potential

benefits & risks of a project, & making a decision whether to proceed.

 The project appraisal stage typically involves the following steps:

• Define the project: The first step is to define the project clearly. This
includes identifying the project's objectives, scope, and deliverables.

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 Cont’d…
• Assess the risks: The next step is to assess the risks associated with
the project. This includes identifying potential risks, assessing their
likelihood and impact, and developing mitigation plans.
• Estimate the costs: The project's costs should be estimated, including
both direct and indirect costs.
• Identify the benefits: The project's benefits should be identified, both
tangible and intangible.
• Make a decision: Based on the assessment of risks, costs, and
benefits, a decision should be made about whether to proceed with the
project.
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 Cont’d…

 The project appraisal should be to identify the weaknesses and means

of strengthening it to ensure final success of the project.

 The appraisal report focuses on the health of the company to be

financed, the returns obtained and the protection of its creditors.

 Appraisals as a rule deal with the project & the industries in which it
will be carried out and its implications for the economy as a whole.

 A wide range of appraisal criteria have been developed to judge the

worthwhile of a project.

 Appraisal criteria's which mainly includes:

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 Cont’d…
• The principal non-discounting criteria are the payback period and the
accounting rate of return.

• The key discounting criteria are the net present value, the internal rate
of return, and the benefit cost ratio.

 To apply the various appraisal criteria suitable cut off values (hurdle
rate, target rate, and cost of capital) have to be specified.

 These are influenced by the level of risk pursued.

 Despite a wide range of tools and techniques for risk analysis

(sensitivity analysis, scenario analysis, ) remains the most intractable
part of the project evaluation exercise.
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 Cont’d…

 Accurate and consistent project appraisal is therefore a crucial factor

in the success of development plans.

 In general this process should give due attention for role of appraisal,
selection criteria and relative importance of criteria.

A. Role of appraisal: For the success of national development plan it is

thus vital that project at the micro-level are found to be suitable.
I. Relevant or it will be the most benefit in a certain situation.
 This refers to the desirability, appropriateness, and significance of a
project proposal in relation to the needs of the target group & to the
goal of national development plan.
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 Cont’d…
 Some of the questions proposed to ensure this criteria are:

• What do the problems consists of?

• What are the development goals in the sector this project contribute?

• What results should the project provides for the target group?

• Do combined results leads to attainment of the project goal?

• Are the activities appropriate to achieve the planned results?

• In what way (s) will target groups participate in the project?

• Have alternative ways of achieving the project goals been conducted?

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 Cont’d…
 Appraising project’s desirability involves a comparison of alternative
costs & benefits generated or incurred by diverse project alternatives.

 Unlike feasibility, it involves the application of valuation techniques

to decide which option will produce the greatest overall benefits.

 The issue of desirability is of particular importance when conducting

financial and economic appraisals.

 The fundamental basis for assessing project desirability is the

supposition that the project will generate benefits, which would not
have been existed if it had not been implemented.

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 Cont’d…
II. Feasible or that which is possible/realistic
 The following questions will be considered as checklists.
• What capacity and resources (personnel, financial, material) does the
project owner possess to implement the project?

• Is the division of roles and responsibilities between parties

participating in the project clearly defined?

• In what way have the technical solutions described been adopted to

the level of skills and capacity in the organization?

• Have time schedule been given for activities & phase out of a project?

• How has the financing of the project been planned?

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 Cont’d…

B. Selection Criteria/Decision to (accept, modify, reject)

 The analysts recommendation may be to approve, re-formulate,

postpone, or discard the project under review.

 It is necessary for the government to publish the essential elements of

their appraisal and selection criteria.

 This enables projects to appraised in a uniform & transparent manner.

 All decisions should then be based on the suitability of various project

components for reaching the standards set out in the appraisal and
selection criteria (feasibility and desirability).
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 Cont’d…

C. Relative importance of criteria and trade-offs

 In appraisal process there are liable to be potential trade-offs to be

made between desirability in various project aspects.

 For instance, increasing the environment desirability of a project may

reduce its financial desirability and vice-versa.

 The appraiser therefore has a decision to make the relative importance

attached to each assessment criteria.

 The rule for the appraisal in this situation is that all project aspects
must meet the feasibility criteria outlined in table 2.

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 Cont’d…

 The relative desirability of these criteria will be decided by political

factors, sectors objectives and the country’s development policy.

 This implies that not considering the development goals of a

government during the preparation of a project is a futile exercise.

 In such a case, judgment must be made on the desirability based on an

interpretation of all the available evidences.

 The rationale for the project provides the basis what evidences to refer
and interpret magnitude of the project’s desirability to the target
groups.

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 1.2.4. Project Implementation Stage
A. Pre-investment Phase
 It deals with all issues related to the financial package and mobilizing
the expertise necessary for successful operation of the project.

 The financing package becomes more difficult to assemble in projects

involving co-financing.

 Co-financing refers to cases where two or more lending agencies

and/or donors join together in a coordinated way to undertake their
loan activities and establish conditions for a particular project.

 Co‐financing takes two forms, joint financing and parallel financing.

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 Cont’d…

 Operational decisions taken during the pre-investment stage:

• Disbursement of the loans

• Recruitment of management and technicians

• Implementation of support programs to ensure supply of inputs

• Mobilizing the financial resources for the project

• Mobilizing the expertise necessary for successful construction and

operation of the project

• Securing land and related resources considering for investment and

feature expansion.
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 B. Investment Phase

 If the preparatory work is finished, the implementation phase follows,

in which first a detailed design of the technical components is made.

 One of the objectives of any effort in project planning and analysis is

to have a project that can be implemented to the benefit of the society.

 The better and more realistic a project plan is, the more likely it is that
the plan can be carried out and the expected benefit realized.

 This emphasizes the need for careful attention to each aspect of

project planning and analysis.

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 Cont’d…
 Circumstances will change, and project managers must be able to
respond sharply to these changes.

 Technical and price changes may require different techniques of

production or adjustments in inputs.

 Changes in the project’s economic or political environment alter the

way project implemented.

 The greater the uncertainty of various aspects of the project, or more

innovative the project is, the greater the changes will have to be made.

 Therefore project managers will need to reshape & re‐plan parts of the
project, or the entire project.
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 Cont’d…
 Delays in implementation, which are common, can lead to substantial
cost overrun. Hence we need:

• Adequate formulation of projects: A major reason for the delay is

inadequate formulation of projects.

• Use of the principle of responsibility accounting: Assigning specific

responsibilities to project managers for completing the project within
the defined time frame and cost limits.

• Develop project management competence: For project planning and

control two basic techniques are available: PERT (Program
Evaluation Review Technique) and CPM (Critical Path Method).
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 Cont’d…
 Implementation involves capability in project management.

 The function of project management is to predict as many of the

problems as possible and to plan, organize and control activities so
that the project is completed successfully in spite of risks.

 Project management is the planning, organizing, directing, and

controlling of resources for a specific time period to meet a specific
set of one-time-objectives.

 The aim is for the final result to satisfy the project sponsor within the
promised timescale and without using more money and other
resources than those, which were originally set aside or budgeted for.
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 Cont’d…
 Project management is a multifaceted process in which many different
things get managed simultaneously.
• Scope management

• Time management

• Human resource management

• Cost management

• Quality management, and

• Communication management

 Successful project management can be defined as having achieved the

project objectives within efficient time and cost.
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 C. Operational Phase
 Project operation involves the running and maintenance of new entity
in accordance with set objectives & planned tasks.

 A number of problems may arise from production techniques,

operation of equipment, low labour productivity or lack of qualified
staff.

 The long-term view relates to chosen strategies and the associated

production and marketing costs & sales revenues.

 If such strategies and projections are proved faulty and remedial

measures will not only be difficult but may prove to be highly
expensive.
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 Cont’d…
 The operational phase involves the following main functions.
I. Commissioning and starting of commercial production: It is the
process of assuring that all systems are designed, installed, tested,
operated, and maintained as required.

II. Ex-post project evaluation: Performance review should be done

periodically to compare actual & planned performance.

III. Replacements/Rehabilitation: The economic life of the visualized

firm is determined by economic life of the ‘core’ technology.

IV. Expansion/Innovation: Expansion may be a rational venture

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 1.2.5. Evaluation and Supervision
A. Supervision
 The purpose of supervision is to ensure that the project’s
implementation is carried out to acceptable standards.

 The execution of the project becomes the prime responsibility of the

borrower, whereas supervision is that of the financing agency.

 The supervision process can be undertaken in terms reviewing the

progress reports, field visits to the country, and timely audits.

 Problem areas are identified and reports of the supervision teams form
the basis on which the borrower may be requested to take certain
corrective measures.
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 B. Evaluation
 Evaluation is a comparative analysis between what the project was
intended to become, in terms of timing and quantity of costs &
benefits, and what actually has happened.

 Ex‐evaluations are means of deriving lessons on a given project’s

undertaking.

 The analyst looks systematically at the elements of success and failure

indicator in project experience to learn better to plan for the future.

 Evaluation may be undertaken by project management, sponsoring

agency, external evaluators, or concerned government planning unit.

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