BDU, CAES: Agricultural Project Planning and Analysis (Agec2731) Lecture Note

Chapter 1: Introduction: Definition and Concepts of Development Project

1.1 What is a project?

Projects are one of the several instruments to achieve particular objectives in a process of
development. They are an integral part of the national development strategy and hence they should
be evaluated with respect to the overall development policy of the country.

Projects are the cutting edge of development. They are the means through which development
targets are achieved and are considered to be a tangible benefit for the project beneficiaries. Without
visible projects on the ground, policies, strategies and plans for development are simply
administrative rhetoric.

The definition of a project varies from place to place, sector to sector, and through time under
specific conditions under consideration. Consequently, a brief and precise definition of a project is
not possible. In most cases, it is easier to describe than to define a project.

A project is defined as an investment activity in which financial resources are spent essentially to
create capital assets that produce benefits over an extended period of time and which logically lends
itself to planning, financing and implementing as a unit (Gittinger P., 1982).

A project can also be defined as:

 A discrete package of investments, inputs and activities designed to remove or alleviate

various development constraints in order to achieve one or more objectives aimed at
improving the quality of life of a group of target beneficiaries over a given time span.
 A complex set of economic activities in which we commit scarce resources in the
expectation of future benefits that exceed the values of these resources.

 In general, a project has the following common features:

 It is a unique activity. It is not a routine segment of an on-going activity.

 It involves investment of scarce resources in the expectation of future benefits.
 It can be planned, financed, and implemented as a unit.
 It has a specific starting & ending time in order to achieve a clearly defined set of objectives.
 It has a conceptual boundary, usually geographical but sometimes organizational.
 The time sequence of inputs to the project & outputs from the project will be fairly well
defined.
 It is likely to have a partially or wholly independent administrative structure & set of
accounts.

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The above definitions and explanations indicate that a project is something unique or different from
the usual way of doing things. It is time bounded, separated from other activities, uses assigned
resources and it is meant to achieve specific objectives.

Why do we need to undertake a project?

We undertake a project for the following development reasons:
 Execute the national development objectives at micro-level,
 Increase agricultural production in the nation,
 Promote exports,
 Create employment opportunities,
 Utilize scarce resources effectively and efficiently (i.e., full employment of resources),
 Pursue agricultural diversification policies (minimizing risk).

Unique features of agricultural projects compared to industrial projects:

 High risk and uncertainty as they are nature dependent and biological in nature,
 Perish ability of products,
 Fixity of gestation or growth period,
 Sequential order of the growth pattern,
 Unique role of land in production, and
 Time sensitivity (seasonality).

Exercise 1.1
1. Define what a project means.
2. List the common characteristics of projects.
3. Discuss the unique characteristics of agricultural projects compared to industrial projects.

1.2 Types of Projects

Different authors categorized types of projects in various ways.

 Depending on how the new resources committed to projects are related to the existing economic
activities, projects can be classified as: new projects, expansion projects and updating
projects.
a) New projects- the largest type of projects around which project analysis group involves new
investments to establish a new productive process independent of the previous lines of
production. They often include a new organization, financially independent of the existing
organization.

b) Expansion projects- involve repeating or extending existing economic activities with the same
output, technology and organization. With its production capacity if the existing project is

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unable to meet the demand of its customers, the organization will expand its products by
incurring additional investments.

For e.g., a charity organization in a given district has a clinic that can serve only 100 patients per
day, but the demand for the various services of the clinic has grown to 200 people per day.
Consequently, the organization has planned to expand the clinic to a health station level that can
serve more patients, and hence allocated Birr 3.5 millions for this purpose. Is this scheme of the
charity organization a project? Yes, because expansion of the existing project is conceptually
considered as a project.

c) Updating projects- involve replacing or changing some elements in an existing activity without
a major change of output. Here, there will be some changes in technology but within the context
of an existing organization, though possibly reformulated.

 The types of projects can also be grouped into four major categories based on the functions they
provide:
1. Experimental projects- attempt to address a problem in an innovative manner using alternative
approaches. For e.g., crop innovation.
2. Pilot projects- enhance the applicability of the experience derived from experimental projects to
local level. It can highlight the problems of implementation, test the effectiveness of the
approach adopted and can provide valuable training experiences for personnel. An important
function of a pilot project is therefore to test the replicability of the project to other areas and to
other beneficiaries.
3. Demonstration project- is basically a forum to exhibit new techniques or approaches of a pre-
tested experiment. For e.g., demonstration farms used to disseminate new crop varieties among
farmers.
4. Production project- has the role of increasing productivity, adjusting to scale requirements and
a high degree of replicability.

Exercise 1.2
1. Discuss the types of projects that are categorized based on how new resources committed to
them are related to existing economic activities.
2. Discuss the types of projects that are categorized based on the functions they provide.

1.3 Development Plans, Programs and Projects

Almost all LDCs have systematically elaborated national development plans to hasten economic
growth and a range of social objectives.

A development plan is a general statement of economic policy. National development plans are
further disaggregated into a set of sectoral plans. For e.g., the last and the current five years
development pan of Ethiopia are Plan for Accelerated Development to Eradicate Poverty
(PASDEP), 2005/06-2009/10 and Growth and Transformation Plan (GTP), 2010/11-2014/15.

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The program approach assumes a hierarchy of decision making at the national level on national
development issues (See Fig. 1.1).

Figure 1.1: The Program Approach in in Formulating a Development Project

 According to the program approach, a development project is formulated and operates in the
following national context.
1. National policies: A government must have some clear policy statements. For e.g.,
‘reduction in poverty’.
2. Strategies: In the context of that policy, the chosen strategies for poverty reduction may be:
enhancing agricultural production, increased social service expenditure, expansion of
employment opportunities, or direct income transfers.
3. Legislation: Policies take effect through legislation, which establishes the institutional
framework. For e.g., empowering the Ministry of Agriculture (MoA) to take action.

Programs

A program is a larger unit composed of a number of projects aiming at attaining one or more
related objectives of a plan. Policies are implemented through programs usually taking 5 to 10
years.

Programs have broadly expressed development objectives. For instance, in the context of a policy
of ‘enhancing agricultural production’, a development objective could be ‘to expand and diversify
the output of the agricultural sector’.

A program is an ongoing development effort which may not necessarily be time bounded.
Examples: a road development program, a health improvement program, a nutritional improvement
program, a rural electrification program, etc.

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Projects

In principle, a project is a smaller unit and a program is a larger unit. However, in practice there
are confusions between projects and programs. Generally, it is advisable to keep a project at its
minimum size because of the following reasons:
 To make it economically, technically and administratively feasible, and
 The higher returns from one part of the project will mask the lower returns from another part
of the project.

 Projects are the building blocks of programs usually with shorter duration. They provide
important means by which investment and other development expenditures appeared in plans
can be clarified and realized.

Sound development plans require good projects, just as good projects require sound planning. This
implies that development plans and projects are interdependent; rather one is a substitute of the
other. Hence, sound planning rests on the availability of a wide range of information about existing
& potential investments and their likely effect on the growth & other national objectives. It is the
project analysis that provides this information.

Effective project preparation and analysis must be set in the framework of a broader development
plan. It is often a stated truism among economists that “a good policy beats a good project any
day”. This reveals that a good policy will affect the whole subsector while a project will affect only
part of the subsector.
For e.g., pricing rice at an economically efficient level, all farmers will be induced to produce
the ‘right’ quantities of rice; however, providing irrigation water below cost to compensate for
the distorted price of rice will affect only those farmers who receive the subsidized water.

A development plan and a program are therefore wider concepts than a project. A program may
include one or more projects at various times whose specific objectives are linked to the
achievement of higher level common objectives.
For e.g., a health program may include a water project & a health center construction project,
both aimed at improving health of the community, which previously lacked easy access to these
essential facilities.

Projects, which are not linked with others to form a program are sometimes referred to as
standalone projects.
 The major difference between a project and a program is not so much in the stated objectives
but lies more on scope, details and accuracy.

A project is designed with a high degree of precision & details regarding its objectives, features,
calculation of returns and implementation plan. In contrast, a program lacks details & precision and
aims at a broader goal often related to a sectoral policy of a country or departmental policy of an
organization.

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Summary of the difference and similarities between projects and programs:

Project Program
Differences  Has specific objectives  Has broad objectives
 Has specific area/geographical unit  May not have specific area
 Has specific target groups  May not have specific target groups
 Has clearly determined & allocated  May not have clear & detailed financial
fund allocation
 Has specific life  May not have specific time of ending
Similarities  Both of them have objectives/purposes
 Both of them require inputs (financial, manpower, materials, etc.)
 Both of them generate outputs (goods and/or services)
 Both of them operate over space and time.

Exercise 1.3
1. Compare and contrast program and project.
2. Explain how a development project is formulated according to the program approach.

1.4 The Project Cycle

A project cycle means the various stages of information gathering, analysis and decision making
that take place from inception to completion of a project. It is a sequence of analytical phases
through which a project passes. These phases can be divided into several equally valid ways,
depending on the executing agencies involved. Some of these stages may overlap. In general, the
project cycle may be divided into five broad phases (Baum, 1978):
1. Identification
2. Preparation and analysis (Project formulation)
3. Appraisal
4. Implementation
5. Evaluation

Figure 1.2: Baum’s Project Cycle

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Each stage of a project cycle will be briefly discussed as follows:

(1) Identification

The first stage in the cycle is to find potential projects. Identification of promising investment
opportunities requires imagination, sensitivity to environmental changes and a realistic assessment
of what the firm can do. There are several sources from which project ideas may come from. Some
of the common sources are:
 Well informed technical specialists
 Local leaders
 Entrepreneurs
 Government policies and development plans
 Proposals to extend existing programs
 Community meetings and public gathering

Project ideas can also be identified based on several aspects of development:

 Unsatisfied demand or 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, drought, or earthquake
 Political considerations

Once project ideas have been identified, the first step is to select one or more potentially viable
projects and eliminate risky and unsound projects at minimum cost. The elimination of these
projects at minimum cost is called preliminary screening. The identification phase is therefore a
screening phase which advances proposals to the preparation phase. The possible alternative projects
must be adequately assessed. In general, this phase would include:
 Analysis of existing situations
 Problems identification and prioritization
 Decisions on whether a project is appropriate
 Description of the project ideas
 Consultation with stakeholders
 Establishment of overall objectives

(2) Project preparation and analysis

It is also called a project formulation stage. Once project ideas have been identified, the process of
project preparation and analysis starts. In this phase, all aspects of a project would be considered
(This part will be discussed in detail under Chapter 2).

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In project preparation and analysis, the first step is to undertake feasibility study that will provide
enough information for deciding whether to begin more advanced planning. The detail of the
feasibility study will depend on the complexity of the project and on how much is already known
about the proposal. This phase generally involves two steps:
 Pre-feasibility study
 Feasibility study

(a) Pre-feasibility study

The identification process will give the background information for defining the basic concept of the
project, which leads to the feasibility study stage. Once a project proposal is identified, it needs to be
examined. To begin with, a preliminary project analysis is done. A prelude to the full blown
feasibility study that help assess (i) whether the project is prima facie worthwhile to justify a
feasibility study and (ii) what aspects of the project are critical to its variability and hence warrant an
in-depth investigation. At the pre-feasibility study stage, the analyst obtains approximate valuation
of the major components of the project costs and benefits. Some of the main components examined
during the pre-feasibility study include:
 Availability of adequate market
 Project growth potential
 Investment costs, operational cost and distribution costs
 Demand and supply factors; and
 Social and environmental considerations

Using these preliminary data supplied by the various discipline specialists, a preliminary financial
and economic analysis will be conducted. If the project appears viable, then detail planning and
analysis will begin in the feasibility 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 worthwhile, a detailed analysis of the marketing,
technical, financial, economic, and ecological aspects of a project will be undertaken. At this stage,
a team of specialists (scientists, engineers, economists, sociologists) will need to work together. At
this stage more accurate data need to be obtained and if the project is viable it should proceed to the
project design stage (appraisal stage). The final product of this stage is a feasibility report. The
feasibility report should contain the following elements:
* Technical analysis * Economic analysis
* Market analysis * Social analysis, and
* Organizational analysis * Environmental analysis
* Financial analysis

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(3) Appraisal

Once a project has been prepared, it is generally appropriate for a critical review or an independent
appraisal to be conducted. It involves a systematic review of all aspects of the project that a decision
can be made as to whether proceed to the implementation phase.

The feasibility study would enable the project analyst to select the most likely project out of several
alternative projects. Selection follows, and often overlaps, analysis. It addresses the question - Is the
project worthwhile? Wide ranges of appraisal criteria have been developed to judge the worthwhile
of a project. They are divided into two broad categories, viz., non-discounting criteria and
discounting criteria.

To apply the various appraisal criteria suitable cut off values (hurdle rate, target rate, and cost of
capital) have to be specified. The level of risk pursued influences these. Despite a wide range of
tools and techniques for risk analysis (sensitivity analysis, scenario analysis, Monte carol
simulation, decision tree analysis, portfolio theory, capital asset pricing model, and so on), risk
analysis remains the most intractable part of the project evaluation exercise. This exercise also
involves undertaking of detailed engineering design; manpower and administration requirement as
well as marketing procedures should be finalized. If the appraisal team concludes that the project
plan is sound, implementation of the project (investment) may proceed.

(4) Implementation

This phase begins immediately after the financial decision on the project is made and ends when it
starts rendering the benefits envisaged. It is during this phase that many of the real problems of
projects first identified. While in the earlier stages of project cycle there were more thinking and less
action, in this stage more action and less thinking are required. Implementation is the most important
part of the project cycle. The better and more realistic the project plan is the more likely the
plan can be carried out and the expected benefits realized.

At this phase, tenders are let and contracts signed. Project implementation must be flexible since
circumstances change frequently. Technical changes are almost inevitable as the project progresses;
price changes may necessitate adjustments to input and output; political environment may change.
Project managers must therefore be able to respond intelligently to these changes. Even as project
implementation is underway, project managers will need to reshape and replan parts of the project,
or perhaps the entire project.

 Project analysts generally divide the implementation phase into three time periods.
1. The investment period (or establishment period)- refers to the period from which the
project investments are made to the point where the project starts to give benefits. In
agricultural projects, this period usually extends from 3 to 5 years.

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2. The development period- refers to the period from which the project starts to give benefits
to the point where the project starts to give benefits at its full capacity, which may also
extend from 3 to 5 years.
3. The full development period- refers to the period from which the project starts to give
benefits at its full capacity to the end of the project life.

Although for practical reasons a project life rarely exceeds 25 to 30 years, usually the project life is
keyed to the normal life of the major asset. Both financial and economic analyses of the project
relate to this time horizon. Translating an investment proposal into a concrete project is a complex,
time consuming and risk loaded task. Delays in implementation, which are common, can lead to
substantial cost overrun.

(5) Evaluation

Many usually neglect this stage. The project analyst looks carefully at the successes and failures in
the project experience to learn how better to plan for the future. In this stage, it is important to
examine the project plan and what really happened. Evaluation is not limited only to completed
projects. Performance review should be done periodically to compare actual performance with
projected performance.

The important roles of evaluating the performance of a project:

 It throws light on how realistic were the assumptions underlying the project
 It provides a documented log of experience that is highly valuable in future decision making
(such as best practices, the resources required and the need for future projects)
 It suggests corrective action to be taken in the light of actual performance
 It helps in uncovering judgment biases
 It induces a desired caution among project sponsors
Weaknesses and strengths should carefully be noted so as to serve as important lessons for future
project analysis. Evaluation should be a natural part of the process and not be seen as a
“punishment” for a project which failed to perform. The project management, the sponsoring
agency, or other bodies may do the evaluation.

Exercise 1.4
1. List the main sources of project ideas.
2. Discuss the difference between pre-feasibility and feasibility analysis.
3. What does project appraisal mean?
4. Describe the three periods of project implementation stage.
5. Discuss the role of evaluation.

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