PROJECT CYCLE

CHAPTER 2

Dr. Abenet Yohannes

2.1 MEANING AND
2.2 World Bank
DEFINITION OF
PROJECT CYCLE Project Cycle

2.3 UNIDO
Project cycle is the different stages, phases, levels, steps, events
or sequences that a project follows.

WHAT IS A
PROJECT
CYCLE?
A project goes through various planning phases before it is
actually realized. These phases constitutes what is often called
“the project cycle”.
• There are many equally valid ways in which the project cycle may
be divided. the most important ones are:

• The European Union project cycle

• The Asian development bank project cycle

• The DEPSA’s Model (Development Projects Studies

Authority's Model) – developed in Ethiopia in 1990.

• The Baum Cycle (also called the World Bank Project Cycle),

• The UNIDO Project Cycle,

4
THE PROJECT CYCLE … CONT’D
• The primary concern of the analyst throughout the
project cycle is to:
• Consider Alternatives
• Evaluate Alternatives
• Make Decisions
2.1. THE BAUM CYCLE (WORLD BANK PROJECT CYCLE)
• Developed by Warren C. Baum in 1970 – adopted by the World Bank by then.
 Identification;
 Preparation;
 Appraisal and Selection; and
 Implementation
• This model amended in 1978 – to include “Negotiation”
and Evaluation”.
• Identification;
• Preparation;
• Appraisal and Selection;
• Negotiation;
• Implementation; and
• Evaluation
2.1. THE BAUM CYCLE (WORLD BANK PROJECT CYCLE)

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2.1. THE BAUM CYCLE (WORLD BANK PROJECT CYCLE)

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THE BAUM CYCLE … CONT’D
1. IDENTIFICATION
First stage in the cycle – is searching for and identifying potentially
feasible projects.
Most projects start as an elementary idea.
o Resource-based project ideas – opportunity to make profitable use
of available resources.
o Market-based project ideas – arising from identified demand in
home or overseas markets.
o Need-based project ideas – to fulfill certain basic material
requirements and services (unsatisfied needs).
o Technical specialists -may identify areas with technical
Deficiencies
o Local leaders - may provide information about existing problems
and bottlenecks.
o Proposals to extend and/or expand existing programs/projects.
o Identifying technological alternatives.
THE BAUM CYCLE … CONT’D
1. IDENTIFICATION
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THE BAUM CYCLE … CONT’D
2. PREPARATION /FORMULATION … Project Design

Involves pre-feasibility and feasibility studies.

A study Covers the establishment of commercial, technical, institutional,

financial, and socio- economic feasibility.

• Decisions made on the:

• scope of the project,

• location and site,

• soil and hydrological requirements,

• project size (farm or factory size), etc.

Local and international consultants highly involve – especially for big

projects (that cover large areas and have big budgets).

THE BAUM CYCLE … CONT’D
3. APPRAISAL AND SELECTION
This stage is a critical review (re-examination) prepared or formulated
project.

Helps to determine whether the proposal is appropriate, sound, and

acceptable or not before large sums are committed.

Consultants do not involve in this process.

Projects appraised both in the field and at the desk level.

For private investments too, only internal staffs involve in the appraisal
process.

• The appraisal team may seek additional/new information if they feel some of
the data used or assumptions made in the stage of preparation are faulty.
THE BAUM CYCLE … CONT’D
3. APPRAISAL AND SELECTION
• Appraisals should cover at least 7 aspects of a project
1) Technical: verifying whether what is proposed will work in the way
suggested or not.
2) Financial: see their sources of financing and reasonable plans for their
repayment are made where necessary.
3) Commercial: examine arrangements for acquisition of inputs and disposal
(marketing) of the products.
4) Incentive: examine whether the project is in the best interest of all the
participants (stakeholders).
5) Economic: verify project’s soundness from the viewpoint of the national
economic development interest, examine whether all project effects
(positive as well as negative)
6) Managerial: examine if capacity exists for operating the project,
7) Organizational: examine the project if it is organized internally and
externally into units, contract, policy, institution, etc.
THE BAUM CYCLE … CONT’D
4. NEGOTIATION AND FINANCING
• Once the project to be implemented is agreed on, for donor funded projects,
discussions are held on funding and associated aspects of funding.

• Conditions for grants,

• Repayment period (for loans),
• Interest rates on loans,
• Flow of funds,
• Contributions from stakeholders, and
• Whether there is co-financing or not.

• This culminates into an “Agreement Document” – binds all the parties

involved in the implementation of the project.

THE BAUM CYCLE … CONT’D
5. IMPLEMENTATION

• The execution of a project which have passed the appraisal checklist

• Funds actually disbursed to get the project started and keep running.

• Problems frequently occur as the economic and financial environment

during implementation often differ from the expectations at the time of

appraisal.

• Original proposals frequently modified, though with difficulty, because

of the need to get agreement between the parties involved.

• Many of the real problems of projects faced at this stage.

• Deficiencies in the capabilities of the project actor can be revealed.

THE BAUM CYCLE … CONT’D
6. EVALUATION
• Look back what has been done in the past,

• is the process of measuring the outputs

• Compare actual progress with the plans,

• Judge whether the decisions and actions taken were responsible and
useful.

• Systematically look at the elements of success and failure in the

project experience

• Helps to learn how better to plan – future projects.

• May take place at several times in the life of a project.

Summary- WBA
2.2. THE UNIDO PROJECT CYCLE

• The UNIDO Manual for Industrial Feasibility

Study outlines 3 distinct phases:

• The pre - investment phase

• The investment phase, and
• The operating phase
2.2.1. THE PRE–INVESTMENT PHASE

• This phase also comprises several stages:

A. Identification of investment opportunities (opportunity

studies);

B. Analysis of project alternatives and preliminary project

selection,

C. Project preparation (pre-feasibility and feasibility

studies);

D. Project appraisal, selection, and investment decision.

2.3. THE UNIDO PROJECT CYCLE
THE UNIDO PROJECT CYCLE … CONT’D
• A. OPPORTUNITY STUDIES

• Provides information on available investment opportunities.

• Is rather sketch in nature and depend more on aggregate

estimates than on detailed analysis.

• highlight the principal investment aspects of a possible

industrial proposition.

• arrive at a quick and inexpensive determination of salient

facts of an investment possibility.

• It should not involve any substantial cost.

THE UNIDO PROJECT CYCLE … CONT’D
• The opportunity study should analyze:

• Natural resources,

• The existing agricultural base (for agro-industries),

• Future demand for consumer goods,

• Imports substitution and export possibilities,

• Environmental impacts (mandatory or non-revenue producing projects),

• Expansions of existing capacity,

• Manufacturing sector (benchmarking from other countries),

• Diversification, etc.
THE UNIDO PROJECT CYCLE … CONT’D
• B. PRE-FEASIBILITY STUDIES

• A feasibility study is a costly and time-consuming task.

• An intermediate stage between a project opportunity study and a

detailed feasibility study.

• Pre-feasibility study helps to see if:

• All possible project alternatives are examined,

• The project concept justifies detailed study,

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

• The project idea is viable and attractive or not.

THE UNIDO PROJECT CYCLE … CONT’D
C. FEASIBILITY STUDIES
• It should provide all data necessary for an investment decision.
 Commercial, technical, financial, economic, and environment
• the possible market shares that can be achieved,
• the corresponding production capacities,
• the plant location,
• existing raw materials,
• appropriate technology and equipment,
• an environmental impact assessment.
• Initial financial requirement (including net working capital),
• the production and marketing costs,
• sales revenue,
• the return on capital invested.
THE UNIDO PROJECT CYCLE … CONT’D

D. APPRAISAL REPORT

• Various parties will carry out their own appraisal of the investment
project in accordance with their individual:
 Objectives,

 Evaluation of expected risks, costs, and gains.

• Large investment and development finance institutions have a

formalized project appraisal procedure and usually prepare appraisal
reports.

• Project appraisal carried out by financial institutions concentrates on the

financial health of the company, the returns to be obtained by equity holders,
and the protection of its creditors.
THE UNIDO PROJECT CYCLE … CONT’D
• 2.2.2. THE INVESTMENT/IMPLEMENTATION PHASE

• This phase provides wide scope for consultancy and engineering work, primarily in the field of
project management.

• Comprises the following stages:

• Establishing the legal, financial, and organizational framework;

• Tendering, evaluation of bids, and negotiations;

• Technology acquisition and transfer;

• Detailed engineering design and contract, including tendering, evaluation of bids, and
negotiations;

• Acquisition of land, construction work, and installation;

• Pre-production marketing, including the securing of supplies and suppliers and setting up the
administration of the firm;

• Recruitment and training of personnel; and

• Plant commissioning and start-up.

THE UNIDO PROJECT CYCLE … CONT’D
• 2.3.3. THE OPERATING PHASE ... Problems arising

• Short-term view – relates to the initial, after commencement of production

period problems.
• Problems associated with the application of production techniques, operation of
equipment, or inadequate labor productivity owing to lack of qualified staff and
labor.

• Their origin is in the implementation phase – relatively easy to overcome due to

learning over time.

• Long-term view – problems that relates to chosen strategies and the

associated production and marketing costs as well as sales revenues.

• These have direct relationships with the projections made at the pre-
investment phase.
Thank You