Transcript
PROJECT IDENTIFICATION AND FORMULATION
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Introduction
A project may be seen as an investment activity where financial resources are expended to create capital assets that produce benefits over extended period of time.
Project identification is the initial phase of the project development cycle.
It begins with the conceiving of ideas or intentions to set up a project.
These ideas are then transformed into a project.
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Project Identication
Collection Project Identification: compilation and analysis of data to locate potential opportunities for starting business and development of such opportunities
!pportunity is a business concept which if turned into a tangible product or service by the enterprise will result into profit. It is all about creating values
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Project Identication
!pportunities are identified through innovation"search of business ideas. Types of innovation:
Additive Innovation # $ully exploiting already existing
resources such as product lines extensions
Complementary Innovation # !ffers something new and introduces few changes in the structure of the business
Breakthrough Innovation %&adical Innovation' # Changes the fundamentals of the business creating a new industry and new avenues for extensive wealth creation
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Dimension of Project Identication Project identification cannot be complete without identifying the characteristics of a project. (very project has three basic dimensions) inputs outputs and social costs and benefits.
The input characteristics define what the project will consume in terms of raw materials energy manpower finance and organi*ational setup. The output characteristics of a project define what the project will generate in the form of goods and services employment revenue etc. the +uantity and +uality of all these outputs should be clearly specified. In addition to inputs and outputs every project has an impact on the society. It inevitably affects the current e+uilibriums of the demand and supply in the economy. It is necessary to evaluate carefully the sacrifice which the society will be re+uired to ma,e and the benefits that will accrue to the society from a given project.
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Importance of Project Identication
It has long term conse+uences %ma,e or brea,' Involves commitment which can not be easily reversed Ideas are put into action Projects are catalytic agents for economic development Involves creative use of resources) manpower capital raw materials etc. -enerates value addition and build)up national capital rings socio)cultural development /eads to development of infra)structure and environment
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Methods f Project Identication
There are five major methods of project identification: 0.Analysis Major Development Problems
/isting ideas in a random way Place the problems by priority order 1elect one problem as the basis for action
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"ontd#$ 2.Analyzing Nation al Development Objectives Policies are instruments designed to attain stated objectives and projects are the tangible reali*ation of these policies
Projects are the end products of a process which begins with an analysis of social needs and gives rise to policies and plans to meet the needs
Techni+ues illustrating lin,ages between objectives and projects can be shown using problem tree and objective tree analysis.
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"ontd#$ 3.Economic Analysis 1tatistical analysis of trade reports ) on examine the data on the flow of imports or exports.
1tudy of Comparative Advantage – the study of successful replicable experience of other countries. Analysis of Linkage # examine existing economic activities %enterprises' in view of their lin,age potential so that backward and forward linka ges can be maximi*ed.
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4.National eso!rce "!rvey
5atural resource surveys are important sources of for identifying agricultural and mineral related development projects.
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"ontd#$ 6."ocio#sp atial %dentification
Approach
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Project
Participator Approach – consultation of the community about the development needs of their
area underta,e together a situation majorand development bottlenec,s whichanalysis enable of to identify ,ey projects. Area Based Functional Analysis – this approach to project identification focuses on assembling a pac,age of complementary projects within the context of village"commune district level development plan rather than an isolated project.
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"ontd#$ In addition to the above five method there are two other major approaches to project identification (a ($
!op"do#n approach Bottom"upappro appro ach Bottom"up ach
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!op"%o#n Approach: Projects are identified based on demands from beyond the community.
Bottom"&p Approach' In this approach community"beneficiaries are encouraged to identify and plan the projects themselves with or without outsiders.
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'dvanta(es of )op-Do*n 'pproach
It may be a rapid response to disasters li,e floods war outbrea, because there is limited time and chance to consult the beneficiaries.
It can be effective in providing important
services li,e education health water roads etc. It can contribute to wider national or international objectives and goals
and therefore potentially be part of a wider benefit %as in the case of trans)boundary resources such as climate water or others'
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+imitations of )op-Do*n 'pproach
7oes not help in modifying strongly established ideas and beliefs of people. Assumes external individuals ,now better than the beneficiaries of the service. Communities have little say in planning process rendering approach devoid of human resource development. Community develops dependency syndrome on outside assistance and does not exploit their own potential. The development wor,ers %change agents' become stumbling bloc,s to people)led development
tendency to impose their own biases etc. on people.
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'dvanta(es of ,ottom-p 'pproach
Interveners accomplish more with limited resources since people tend to safeguard what they have provided for themselves.
7evelops people8s capacity to identify problems
and needs and to see, possible solutions to them. Provides opportunities of educating people.
9elps people to wor, as a team and develop a ;(< attitude ) ma,es project progressive and sustainable.
&esources are effectively managed= dependence reduces there is increased e+uity initiative accountability financial and economic discipline.
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+imitations of ,ottom-p 'pproach
5ot always effective for projects that re+uire urgency to implement Time)consuming and re+uires patience and tolerance. People sometimes disli,e approach because they do not want to ta,e responsibility for action. The agency using this approach is never in control and cannot guarantee the results it would want. The priorities of communities may not fit with national or international priorities that see, to have a broader impact
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7uring preliminary selection the analyst should eliminate project proposals that are:) technically unsound and ris,y= expected to have inade+uate supply of inputs= costly in relation to benefits=
assumed over ambitious sales and profitability=
not consistent with national development objectives=
environmentally unfriendly=
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y the end of the identification stage we should ,now:)
whether further detailed wor, is justified
what major issue have been identified>
what project alternatives have been considered>
which of them have been rejected> rough estimate of costs including specific for promising projects
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Project .e/ection 0 Idea eneration
Project selection process starts with the generation of a product idea.
In order to select the most promising project the entrepreneur needs to generate a few ideas about the possible projects he"she can underta,e.
The project ideas can be discovered from various)internal and external sources.
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Identication of investment opportunities
Internal 1ources
1;!T Analysis
Analysing the industry
Analysing the input)output relationships
Analysing the labour and capital mar,et
Analysing the consumer mar,et
(xternal 1ources
-overnment &egulations
Import " (xport opportunities
1uggestions from financial institutions
1urvey of social and economic resources
1urvey of new technology
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Project .e/ection 0 Idea eneration
Project ideas should in general aim at overcoming constraints to the development effort. These constraints can be:)
material
h!man or instit!tion
meeting !nsatisfied needs and demand for goods and services
foreign e&change constraints that might necessitate projects for import s!bstit!tion or e&port promotion
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"ontd#$
Project ideas arise from identification of a number of different factors.
A' At the micro#level project ideas emanate from:)
The identification of unsatisfied demands or needs= The existence of unused or underutili*ed resources= The need to remove shortages in essential materials services or facilities that constrain the development effort= The initiative of private or public enterprise in response to incentives provided by the government= The necessity to complement or expand investments previously underta,en= The desire of local groups or organi*ations to enhance their economic status and improve their welfare=
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"ontd#$ ' At the macro#level project ideas emerge from:)
5ational sectoral or regional development plans strategies=
Constraints in the development process due to shortages of essential infrastructural facilities problem in the balance of payments etc.
?nusual such as droughts flood earth+ua,es hostilities events etc= Project proposal could also srcinate from foreign firms= Individual inspiration institutions wor,shops development experiences of other countries= Project ideas can also srcinate from multilateral or bilateral development agencies= To correct social and regional ine+ualities.
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.e/ect deve/opment projects
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"riteria for se/ectin( a project
Investment si*e
/ocation of project
Technology to be used
(+uipment @ar,eting
/abour
;or,ing Capital &e+uirements
(conomic iability
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Investment sie: Investment si*e depends upon the entrepreneur8s capacity to raise resources and his attitude towards economies of scale. If the project is to be financed through all)India institutions with lesser promoter8s contribution the project cost should be at
least &s.3 to 6 crores.
Location of project: A new entrepreneur should as far as possible locate his project in and around a state head+uarters. 1uch a location helps to attract competent managers and facilitates liaison with the 1tate Industrial 7evelopment Corporation the 1tate (lectricity oard and various other agencies.
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!echnology to $e used: It is better for a new entrepreneur to go in for a project with proven technology which is indigenously available. It avoids the problems of foreign technical collaboration and ma,es life easier.
)*uipment' ;hile selecting the e+uipment the advice of experienced technical consultants should be obtained. 1ome entrepreneurs enter into some sort of a deal with the e+uipment manufacturers for a B,ic,) bac,8 and in the process sacrifice +uality. This is shortsightedness and no compromise on +uality should be made.
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+arketing: It is advisable to go in for a product with a limited number of industrial customers. A new entrepreneur should not go into a project having cut throat competition.
La$our: a shrewd entrepreneur should minimi*e uns,illed and semi)s,illed labor. @aterial handling labor can be reduced through automatic handling devices and proper buying policies.
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,orking Capital -e*uirements : the entrepreneur should avoid projects with very long operating cycle and re+uiring huge wor,ing capital. The lending policies of ban,s are unpredictable and therefore good margin money should be provided for. This is
particularly necessary when the entrepreneur has to buy from any government agency % advance payments' or to sell to a government agency %delayed settlement of bills'.
)conomic .ia$ility : the project should brea,)even on a cash basis in the first )D months. It should generate profits in the first year of operations.
MARKET AND DEMAND ANALYSIS
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+arket / %emand Analysis
An integrated approach to generate power by critical analysis of the mar,et logistically.
-ives answer to two important +uestion: 0. ;hat should be the total demand for the product"service. 2. ;hat share of the mar,et would the proposed project enjoy. 0 E 2 F Profitability of the project.
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0teps in +arket / %emand Analysis
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e .tep in Maret Demand 'na/sis and their Inter-re/ationship Colletion o" Seonda&y In"o&'atio n Situational Analysis and Spei!ation s o" O#$eti%es
De'and Fo&eastin +
C)a&ate&i*ati on o" t)e Ma&(et
Condut o" Ma&(et Su&%ey
Ma&(et Plannin+
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'$ .pecication of jectives
-et a feel< for the relationship between the product and it8s mar,et the project analyst may informally tal, to customers competitors middlemen and other in the industry.
/oo, at the experience of the company to learn about the purchasing power of customer action G strategies of competitors.
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'$ .pecication of jectives
!bjectives give answer to following +uestions:
0.
;ho are the consumer>
2.
9ow many consumers are there>
3.
;hat do they want>
6.
;hy do they want it> ;hen do they want it>
.
9ow do they want it>
H.
;here do they want it>
D.
;hat +uality is desirable>
.
9ow much can they spend>
0J.
;hat price is acceptable>
4.
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,$ "o//ection f Maret Information
Primary 7ata )) information collected first hand. )) +uestionnaires surveys interviews etc.
1econdary 7ata )) information already been collected . )) Census of India India Kear oo, Planning commission reports (conomic 1urvey Industrial potential surveys etc.
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.econdar .ources of Data
Indian (conomic 1urvey Indian asic $acts &eports of (xport ;or,ing -roups on arious Industries Census of @anufacturing Industries Indian 1tatistical Kearboo, @onthly 1tatistical ulletin Annual &eport of &I Annual &eports and Accounts of the Companies /isted on the 1toc, (xchange Annual &eports of the arious Associations of @anufacturers
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"$ "onduct of Maret .urve
@ar,et survey is used when secondary data is not available or not fully available.
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1ome Problems:
9eterogeneity of the Country
@ultiplicity of the /anguages
7esign of Luestionnaire
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D$ "haracteristics f Maret
This step characteri*es the mar,et on the basis of information gathered.
0.
7emand for the products"services
2.
@ar,et 1egments
Consumer -roups
-eographic ariables
7emographic ariables
Psychographic ariables
ehavioural ariables
3.
Price
4.
@ethods of distribution and sales promotion
6.
Consumers
.
1uppliers G Competitors
H.
-overnment Policy
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orecastin(
Predicting the future
Lualitative forecast methods subjective
Luantitative forecast methods
based on mathematical formulas
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)pes of orecastin( Methods
7epend on
time frame
demand behavior causes of behavior
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)ime rame
Indicates how far into the future is forecast
1hort) to mid)range forecast
typically encompasses the immediate future
daily up to two years
/ong)range forecast
usually encompasses a period of time longer than two years
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Demand ,ehavior
Trend
&andom variations
movements in demand that do not follow a pattern
Cycle
a gradual long)term up or down movement of demand
an up)and)down repetitive movement in demand
1easonal pattern
an up)and)down repetitive movement in demand occurring periodically
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"auses of ,ehavior
Analytical
Cause effect relationship basis
Luantitative
(xplicit
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8$ Demand orecastin(
Lualitative @ethods
These methods rely essentially on the judgment of experts to translate +ualitative information into +uantitative estimates
?sed to generate forecasts if historical data are not available %e.g. introduction of new product'
The important +ualitative methods are:
1ury of )2ecutive +ethod
%elphi +ethod
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9ur of 8:ecutive pinion Method
-ationale
?pper)level management has best information on latest product developments and future product launches
Approach
1mall of # upper)level managers collectively developgroup forecasts !pinion of -roup
+ain advantages
Combine ,nowledge and expertise from various functional areas People who have best information on future developments generate the forecasts
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9ur of 8:ecutive pinion Method
+ain dra#$acks
(xpensive 5o individual responsibility for forecast +uality &is, that few people dominate the group 1ubjective &eliability is +uestionable
!ypical applications
1hort)term forecasting
and
medium)term
demand
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De/phi Method
-ationale
(liciting the opinions of a group of experts with the help of mail survey
Anonymous written responses encourage honesty and avoid that a group of experts are dominated by only a few members
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De/phi Method
Approach
Coo&dinato&
Ea) e-pe&t
Coo&dinat
Sends Initial ,uestionnai& e
.&ites &esponse /anony'ous 0 Coo&dinato& sends updated 1uestionnai& e
o& pe&"o&'s analysis No
Consens us &ea)ed2
Yes
Coo&dinat o& su''a&i*e s "o&east
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De/phi Method
+ain advantages -enerate consensus Can forecast long)term trend without availability of historical data
+ain dra#$acks 1low process (xperts are not accountable for their responses /ittle evidence that reliable long)term forecasts can be generated with 7elphi or other methods
!ypical application
/ong)term forecasting
Technology forecasting
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)ime .eries Projection Methods
These methods generate forecasts on the basis of an analysis of the historical time series.
Assume that what has occurred in the past will continue to occur in the future
&elate the forecast to only one factor ) time
The important time series projection methods are:
Trend Projection @ethod
(xponential 1moothing @ethod @ethod
@oving Average @ethod
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)rend Projection Method Advantages
It uses all observations
The straight line is derived by statistical procedure
A measure of goodness fit is available
%isadvantages
@ore complicated
The results are valid conditions are satisfied
only
when
certain
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8:ponentia/ .moothin(
(xponential smoothing forecasts are modified in the light of observed errors.
If the forecast value for year t $ t is less than the actual value for year t 1t the forecast for the year tE0 $t E 0 .. Ft E 0 F F t
;here F
t
E0
EMe
t
F forecast for year '
M
F smoothing parameter
et
F error in the forecast for year t F S F F t
t
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Movin( 'vera(e
Naive forecast demand in current period is used as next period8s forecast
1imple moving average
uses average demand for a fixed se+uence of periods stable demand with no pronounced behavioral patterns
;eighted moving average
weights are assigned to most recent data
According to the moving average method S E S # 0 ENE S # n E0 F E0F
t
t
t
t
n
where F
t E 0
St n
F forecast for the next period F sales for the current period F period over which averaging is done
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;ei(hted Movin( 'vera(e Adjusts moving average method to more
closely reflect data fluctuations n
'i Di
'MAn 3 i()
#here
'i 3 the #eight for period i4 $et#een 5 and 655 percent
'i 3 6755
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;ei(hted Movin( 'vera(e 8:amp/e MONTH
WEIGHT
August 45 3 September 6 65 October 758
DATA
36 7 33 7 97 6
No%e'#e& Fo&east
WMA6 : Wi Di i=1
: /7;870/970 < /7;660/3370 < /7;340/3670 : 376;= o&de&s
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"ausa/ Methods
Causal methods see, to develop forecasts on the basis of cause)effects relationships specified in an explicit +uantitative manner.
Chain &atio @ethod Consumption /evel @ethod
(nd ?se @ethod
/eading Indicator @ethod
(conometric @ethod
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"hain
Technological re+uirements
>
Input constraints
>
@ar,et conditions Investment cost G resources of firms
>
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5$ +ocation and .ite se/ection
5earness to raw)materials and mar,et
Availability of infrastructure
/abour situations -overnment policies
!ther factors
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6$ Machiner and 8=uipment Technical analysis of a project idea should
include the study of re+uired machinery and e+uipment to run the project. The
machinery and technology re+uired depends on the plant capacity and type of technology selected.
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7$ "harts and +aouts @aterial $low 7iagram Production /ine 7iagram Transport /ayout ?tility Consumption /ayout Communication /ayout !rganisation /ayout Plant /ayout
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!$ ;or .chedu/e To anticipate problems li,e to arise during the installation phase and suggest possible means for coping with them
To establish the phasing of investments ta,ing into account the availability of finances
To develop a plan operations covering the initial period %the running ) in period'.
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%$ "ost of Project
/and and site development uilding and civil wor,s Plant and machinery Technical Snow)how and (ngineering fees (xpenses on foreign technicians and training of Indian technicians abroad Preliminary and capital issue expenses. Pre)operative expenses @argin money for wor,ing capital Initial cash losses
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inancia/ 'na/sis
The $inancial Analysis examines the viability of the project from financial or commercial considerations and indicates the return on the investments.
+ain Activit y' Activity'
$inancial (valuation of Project
9ther Activit y' Activity'
Cost of Project
7ecision about sources of finance
;or,ing capital re+uirement.
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inancia/ 8va/uation of Project
$inancial (valuation is a Planning Process used to determine whether a firm8s low term investment in project is financially feasible or not. !n the basis of expected inflows and outflows in future.
1ome of the commonly used techni+ues for financial analysis are as follows. Pay)bac, period.
&eturn on Investment %&!I'
5et Present alue %5P'
Profitability Index%PI'"enefit Cost &atio
Internal &ate of &eturn %I&&'
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Cost o" Ope&ato&s /"&o' Te)nial Analysis0
Re%enue Cas) In>o.s /"&o' Ma&(et and De'and Analysis0
Finanial Cost /"&o' Finanial Analysis0
Cost Cas) Out>o.s
Net Cas) In>o.s
?a&ious App&aisal Te)ni1ues ? ARR ? P@P
AeptRe$et Deision
? NP? ? IRR ?PI et;
PROJECT FORMULATION ;hat is Project $ormulation> 1tages of Project $ormulation Project &eport
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;hat is Project ormu/ation@
Ta,ing a first loo, carefully and critically at the project idea
Carefully weighing its various components
Analysing with the assistance of specialists or consultants
Assessment of the various aspects of an investment proposition
It is an important stage in the pre)investment phase
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Project ormu/ation
Project formulation is a systematic and logical way of developing cost effective solutions to development problems.
Kou can learn about Therefore formulating a project by formulating projects
think*
p!t yo!r tho !ghts on p aper+
disc!ss with others+
check facts and it may re,!ire re#writing several times+
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.ta(es of Project ormu/ation 0. 2. 3. 4. 6. . H.
$easibility Analysis Techno)(conomic Analysis Project 7esign and 5etwor, Analysis Input Analysis $inancial Analysis Cost)enefit Analysis Pre)Investment Analysis
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1$ easii/it 'na/sis
$irst stage in project formulation
(xamination to see whether to go in for a detailed investment proposal or not
1creening for internal and external constraints
Conclusion could be:
The project idea seems to be feasible
The project idea is not a feasible one
?nable to arrive at a conclusion for want of ade+uate data
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2$ )echno-8conomic 'na/sis 1creens the idea to)
(stimate of potential of the demand for
goods"services Choice of optimal technology This analysis gives the project a platform for preparation of detailed project design
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3$ Project Desi(n and Aet*or 'na/sis
It is the heart of the project entity
It defines the se+uence of events of the project
Time is allocated for each activity
It is presented in a form of a networ, drawing
It helps to identify project inputs finance needed and cost)benefit profile of the project
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4$ Input 'na/sis
Its assesses the input re+uirements during the construction and operation of the project
It defines the inputs re+uired for each activity
Inputs include materials human resources
It evaluates the feasibility of the project from the point of view of the availability of necessary resources
This aids in assessing the project cost
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5$ inancia/ 'na/sis
It involves estimating the project costs operating cost and fund re+uirements
It helps in comparing various project proposals on a common scale
Analytical tools used are discounted cash flow cost)volume) profit relationship and ratio analysis
Investment decisions involve commitment of resources in future with a long time hori*on
It needs caution and foresight in developing financial forecasts
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6$ "ost- ,enet 'na/sis
The overall worth of a project is considered
The project design forms the basis of evaluation
It considers costs that all entities have to bear and the benefit connected to it
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7$ Pre-investment 'na/sis
The results obtained in previous stages are consolidated to arrive at clear conclusions
9elps the project)sponsoring body the project)implementing body and the external consulting agencies to accept"reject the proposal
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"onstraints in Project ormu/ation
/ac, of a viable " feasible project idea
/ac, of realistic " achievable objectives
/ac, of necessary resources " infrastructure to convert idea into reality
Policies of government " /egal restrictions
/engthy and cumbersome procedures to get finance start business
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Project
