CHAPTER TWO

Project cycle management

• What is Project Cycle ?

• Project Management ?

• Project preparation ?

• What is the importance of Project Cycle

Management in project planning and
analysis
 Project cycle
• Project Cycle:
– It is a sequence of events, which a project follows.
– refers to the various stages through which project planning proceeds
from the inception to implementation.
– it is the life cycle through which a project advances from infancy to
maturity.

• The main features of this cycle are information gathering, analysis, and
decision-making.

• Throughout the project cycle, the primary concern of the analysis is to:
– Consider alternative,
– evaluate them and to make decisions on which of them should be
advanced to the next stage.
2.1. Elements of the project cycle are:
1. Identification

2. Preparation
1. Pre-feasibility Study
2. Feasibility

3. Appraisal and agreement

4. Implementation

5. Monitoring and Evaluation

 Project Cycle Map

Identification

Ex-post
Evaluation Preparation
Pre-feasibility &
Project Feasibility study
Cycle

Implementation

Appraisal
1. Project Identification
• The first stage in the project cycle is to find potential projects

• At this stage the project idea is translated in to a preliminary

description of a project and it involves:
• Finding potentially fundable projects

• In general the source of the project ideas are the following:

– Project ideas from technical specialists
– Project ideas from local leaders
– Project ideas from entrepreneurs
– Project ideas from government policy and plans

• Different approach's to the project are identified and judgments made

regarding which option should be taken forward to project preparation,
• The identification 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

– Technology - to make use of available technology

– Natural calamity - intervention against natural calamity such

as flood or drought

– Political considerations
 2. Project preparation 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
• In preparation/designing stage of the project
– Objectives, pre-requisites, inputs/outputs, organization,
participants and clearances are all defined

– Its cost and earnings are calculated

– A financial plan is prepared,

– Expected results are analyzed

– The socio economics and environmental impacts are
estimated

– The provisional and final documentation work are prepared

• 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

Preparation involves generally two steps:
Pre-feasibility studies
• Some of the main components examined during the
prefeasibility 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

– If the project appear viable from this preliminary assessment

the analysis will be carried to the feasibly stage.
b. 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.

– If the preliminary screening suggests that the project is prima

facie/evidence of facts worthwhile, a detailed analysis of the
marketing, technical, financial, economic and ecological aspects will
be undertaken.

– The focus of this phase of capital budgeting is on gathering,

preparing, and summarizing relevant information about various project
proposals, which are being considered for inclusion in the capital
investment

– The final product of this stage is a feasibility report.

The feasibility report should contain the following elements:

• Market analysis

• Technical analysis

• Organizational analysis

• Financial analysis

• Economic analysis

• Social analysis, and

• Environmental analysis
3. Project Appraisal (Selection & design)
• The feasibility study would enable the project analyst to select the
most likely project out of several alternative projects.

• At this stage:
– Documents are prepared from the project documents and a
succession of appraisal/agreement meeting
– Clearance and finance negotiations takes place

– It addresses the question - is the project worthwhile?

 4. Implementation phase

• After the project design is prepared negotiations with the

funding organization starts and once source of finance is
secured implementation follows.

• At this stage the project management and lines of

command are established,
• Various implementation procedures established
• In the course of implementation; project progress is
monitored, revision and adaptation are made for
unexpected events,
• Finally the project is brought to completion
• Project analysts generally divide the implementation
phase into three time periods.

1. The investment phase, where the major investments

are made..
2. The development phase, which may also extend from
three to five years
3. The project life
 5. Evaluation Phase
• The final phase of the project cycle,

• Evaluation involves the systematic collection of information

about the activities, characteristic and outcomes of an activity or
action, in order to determine its worth or merit

• Project evaluation is a monitoring (checking) activity in order to:

– Find out how things are going;
– Encourage the project team;
– Check that promised resources are in fact working on project tasks;
– Rapidly learn about concerns and difficulties;
– Show concern for the success of the project; and
– Take corrective action if things go wrong.
 Evaluation cont’…

• In this stage it is important to examine the project plan and what

really happened

• The project analyst looks carefully at the successes and failures

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

• Performance review should be done periodically to compare

actual performance with projected performance.
 Quiz 1
Date 25/07/2010
54/60 students

1. Write the three time periods of implementation phase of a

project.(1 pt)

2. What are the first and final phase of a project cycle?(2pts)

3. List the two steps involved in project preparation phase.(2pts)

Brain Storming
 2.2. Analytical Aspect of the Project
Framework of project analysis
• The project analyst must consider several aspects when carrying project
analysis/investigation

• These are all inter-related, and the importance of each varies from project
to project, or design to design

• Framework: an essential supporting or underlying structure

• Analysis: a detailed examination of the elements or structure of

something

• It is used to identify analytical elements for each stage in project cycle.

– During preparation, analysis and subsequent evaluation and impact
assessment.
• The major aspects of project preparation and analysis are :

1. Technical,
2. Institutional, organizational and managerial aspects,
3. Social,
4. Commercial,
5. Financial,
6. Economic and
7. Environmental aspects
 A. Technical Aspects:
The technical analysis is concerned with the projects inputs
(supplies) and outputs of real goods and services and the
technology of production and processing

• It is analysis of the technical and engineering aspects of a project

to be done continuously when a project is formulated

• This aspect may include the works of engineers, soil scientists and
agronomists in case of say, agricultural projects.

• Poor technical analysis will result in under- or over- estimation of

quantities related to inputs required by and outputs of the project.
 Technical A. cont’…
In general the technical analysis is primarily concerned with:
• Material inputs and utilities
• Manufacturing process and technology
• Product mix

• Plant capacity
• Location and site
• Machines and equipment

• Structure and civil works

• Project charts and layouts
• Work schedule
 Technical A. cont’…
The technical analysis examine the possible technical relations in a proposed
agricultural project:
– The soils in the region of the project and their potential for agricultural
development;

– The availability of water, both natural (rainfall, and its distribution) and
supplied (the possibilities for developing irrigation, with its associated
drainage works);

– The crop varieties and livestock species suited to the area;

– The technical analysis also examine the marketing and storage facilities
required for the successful operation of the project, and the processing
systems that will be needed.
 B. Commercial and Business Aspects:

Commercial aspect includes

– market demand for the project,
– effects on price,
– processing and value added effects and
– effects on the domestics and/or export market and quality of
the product,
– Inputs and supply issues: securing supplies( fertilizer,
pesticides and seeds) and financing

• It also assesses possible means in which the market will absorb the
output without affecting the output price and if it price inevitably
be affected, we would have to assess its magnitude.
Business analysis is basically concerned with two questions:
1. What would be the aggregate demand of the proposed
product/service in future?
2. What would be the market share of the project under appraisal?

• To answer the above two questions the project analyst requires a wide
variety of information and need to use appropriate forecasting methods.

• The kinds of information required are:

1. Consumption trends in the past and the present consumption level
2. Past and present supply positions
3. Production possibilities and constraints
4. Imports and exports

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Commercial … Aspects cont’…

5. Structure and competition

6. Cost structure
7. Consumer behavior, intentions, attitudes, preferences, and
requirements
8. Distribution channels and marketing policies in use
9. Administrative, technical, and legal constraints.
 C. Institutional-Organizational-Managerial Aspects:
• It is the detail analysis of institutional setting(i.e. rule of conduct) is
important for the success of the project.

• Customs and culture of the participants have to be understood and

accounted to avoid the disruption in the way societies are accustomed.
– Hence increase the possibility of adoption or rejection

• Some important aspects includes land tenure, indigenous farmers

organizations, authority and responsibility

• This analysis aims at answering the following questions:

– Is the organizational set-up of the project adequate?
– Will the project be provided with competent personnel to manage it?
 Institutional cont’…

• The problem of project staffing raises many other

questions:
– Is local manpower market enough to provide the project
with the required manpower?
– Can competent staff be recruited freely?
– Should they be recruited locally or overseas?

• But even if the right staff is available, their success will

depend mostly on the institutional set-up.

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 D. Financial Aspects:
• Financial analysis seeks to determine whether the proposed
project will be financially viable or not.

• Here the project analyst is concerned with the financial effects of

the proposed project on each of its various participants (firms,
farmers/workers, government etc.)

• By examining the financial implications of the project for these

parties,
• The analysts need to identify the projects financial efficiency,
(say, could the firm have enough working capital?).
 Financial… cont’…
• The financial analysis establishes the magnitude of costs of
investment, production and overheads and magnitude of
benefits

• This analysis will be the basis for evaluating the project

profitability.

• Its profitability depends on a comparison of costs versus

revenues using realistic market prices of materials, labor and
outputs.
 Financial… cont’…
While conducting financial appraisal, we have to looked into:
1. Investment outlay /expenditure and costs of the project
2. Means of financing; source of finance, credit terms, interest
rates, etc
3. Cost of capital
4. Projected profitability
5. Cash flows of the project
6. Investment worthiness judged in terms of various criteria of
merit
7. Projected financial position

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 Financial… cont’…

• Financial analysis must generate future financial statements

such as income statement, balance sheet and uses-and-
source-of-fund statement.

• The financial analysis must clearly show fund flows in each

period in the project life.
 E. Economic Aspects:
• The economic aspects are the most important in ultimately
determining impact of any public sector investment in agriculture.

• Economic aspects determine the value of the project from the

viewpoint of society at large and
– also to determine the economic efficiency with which scarce
resources are allocated

• In such evaluation the focus is on the social costs and benefits of a

project, which may often be different from its monetary or
financial costs, and benefits.
– The financial analysis views the project from the participants (or
owners) point of view, while the economic analysis form the society's
point of view.
 F. Social Aspects:
• Project analysts are also expected to examine the broader social
implications of the proposed project.

• It should address the income distribution implications of a

project.
– Other closely related aspects as
• Employment opportunities,
• Losers and gainer in terms of social groups, gender issues
impacts on social organization, changes in tenurial division
of labor,
• Quality of life improvement( water; health; education
• stimulating or competing effects with other sectors, and
• other desired objectives must be considered.
 G. Environmental aspect analysis
• It deals with primarily with adverse biological and physical
environmental impacts: irrigation, notable scenic beauty, …

• Its effect on the world of animals, plants, water, air, and

humans existing in the project area.

• Ecological analysis should be done particularly 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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 Summary

• There are generally seven aspect of project analysis this are:

– Technical
– Institutional, organizational and managerial aspects

– Social
– Commercial

– Financial
– Economic and

– Environmental aspects
• The technical analysis is concerned with the projects inputs (supplies) and
outputs of real goods and services and the technology of production and
processing.

• Commercial aspect analysis needs to ensure the existence of effective demand

at remunerative price

• Institutional, organizational and managerial aspects must make a detail analysis

of project organization and management.

• Financial analysis seeks to ascertain whether the proposed project will be

financially viable in the sense of being able to meet the burden of servicing
debt and whether the proposed project will satisfy the return expectations of
those who provide the equity capital.
• The economic aspect of project preparation is primarily concerned
with the determination of the likelihood of the proposed project,
and hence the committing of scares resources, by justifying the
significance of the project from the whole economy point of view
(the society as a whole)

• Social aspect expected to examine the broader social implications

of the proposed project

• Environmental aspects deal primarily with adverse biological and

physical environmental impacts, i.e. irrigation, bilharzia, notable
scenic beauty, preserving unique plants and animals, etc.