Chapter Two

The Project Cycle

 2.1. What is project Cycle?
• It is a sequence in which projects are planned and carried.
• The cycle starts with the identification of an idea and
develops that idea into a working plan that can be
implemented and evaluated.
• The project cycle considers various stages in which each stage
not only is grown out of the proceeding one/those that are
under way/but also leads into the subsequent ones.
• There are alternative models that deal with the project cycle.
The most commonly used models are;
– The BAUM Cycle (also called the World Bank Project Cycle) and
– The UNIDO Project Cycle.
– In addition to these two, a third model developed by Development
projects Studies Authority in Ethiopia (called “The DEPSAs Model”),
which is more or less identical with the UNIDO cycle, will be briefly
discussed.
2.2. World Bank’s Project Cycle
• Warren. C. Baum in 1970 was by then adopted
by the World Bank as a project cycle. Initially,
this model had recognized only four main
stages in the project cycle, namely:
• Identification
• Preparation
• Appraisal and Selection
• Implementation
• Later in 1978, the author has added additional
two stages called “Negotiation” and “Evaluation”.
1. Identification
• The first stage in the project cycle and in the planning
process is to find potential projects.
• The sources of projects may be one or more of the
following:
– “resource based” stem from the opportunity to make
profitable use of available resources.
– “market based” arising from an identified demand in home or
overseas markets.
– “technical specialists” and “local leaders”. Technical specialists
could identify many areas where they feel new investments
might be profitable, while local leaders may have suggestions
about where investments might be carried out.
– “proposals to extend and/or expand existing programs and
projects”
2. Preparation

• At this stage, the project is being seriously

considered as a definite investment action.
• Project preparation,(also called project
formulation), involves;
– Pre-feasibility and feasibility studies
– Decisions on the scope of the project,
– Location and site,
– Soil and hydrological requirements,
– Project size (farm or factory size), etc.
 Pre-feasibility studies
• The identification process will give the background information for
defining the basic concept of the project, which leads to the
feasibility study stage.
• 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
 Social and environmental considerations
 If the project appear viable form this preliminary
assessment the analysis will be carried to the
feasibly stage.
 Feasibility studies
• 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.
• At this stage more accurate data need to be obtained and if the
project is viable it should proceed to the project design stage .
• The feasibility report should contain the following elements:
 Market analysis
 Technical analysis
 Institutional and organizational analysis
 Financial analysis
 Economic analysis
 Social analysis, and
 Environmental analysis
 3. Appraisal and Selection:

• Analysis of a proposed project to determine its merit

and acceptability in accordance with established
criteria.
• This is the final step before a project is agreed for
implementation.
• It checks that the project is feasible against the
situation on the ground, that the objectives set remain
appropriate and that costs are reasonable.
• Project appraisal involves a further analysis of the
proposed project.
• At this stage, a critical review of the proposal is
undertaken
 Cont…
Appraisals should cover at least seven aspects of a project;
1. Technical: here the appraisers concentrate in verifying whether what is
proposed will work in the way suggested or not.
2. Financial : the appraisers try to see if the requirements of money needed by
the project have been calculated properly, their sources are all identified, and
reasonable plans for their repayment are made where necessary.
3. Commercial: the way the necessary inputs for the project are conceived to be
supplied is examined and the arrangements for the disposal of the products
are verified.
4. Incentive: the appraisers see stakeholders interest to take part in the project.
5. Economic: the appraisers here try to see whether what is proposed is good
from the viewpoint of the national economic development interest.
6. Managerial: this aspect of the appraisal examines if the capacity exists for
operating the project and see if those responsible ones can operate it
satisfactorily.
7. Organizational: the appraisers examine the project it is organized internally
and externally into units, contract, policy, institution, etc
 Cont…
• On the basis of an appraisal report, decisions are
made about whether to go ahead with the project
or not.
• The appraisal may also change the project plan or
develop a new plan.
• After appraisal, the viable project proposals are
chosen for implementation on the basis of the
priorities of the stakeholders and the available
resources.
• Following appraisal, some projects may be
discarded.
 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 such as;
– conditions for grants,
– repayment period,
– interest rates on loans,
– flow of funds,
– contributions from stakeholders,
– and whether there is co-financing or not.
• This culminates into an “Agreement Document” for
the project, which binds all the parties involved
during implementation of the project.
 5.Project Implementation
• Project implementation is a phenomenon by which project
studies are translated into reality within their specified
time and budget
• This is the crucial stage of any project since the
objective of the earlier effort in the stages above was
to have projects to be undertaken
• At this stage, activities of the project are actually
carried out and funds are disbursed to facilitate the
activities.
• However, depending on the physical and policy
environment, there may be need for flexibility in
response to the reality on the ground.
 Implementation Cont…
Factors affecting Implementation
1. Technical factors;- know-how about technology
2. Economic and financial factors:- credit, subsidies,
pricing
3. Commercial factors;-marketing of outputs, supply of
inputs
4. Socio-cultural factors;-tradition, social structure
5. Political factors;-power structure, leadership
patterns
6. Institutional, organizational and managerial factors
7. People‘s participation
8. Integration and coordination; both vertical and
 6.Project Evaluation
• Evaluation can be defined as a periodic assessment of the
relevance, efficiency, effectiveness, impact, economic and financial
viability, and sustainability of a project in the context of its stated
objectives.
• This stage involves a systematic review or examination of the
elements of success and failure in the project experience during
the project life to learn how better to plan for the future.
• This implies that evaluation is a continuous exercise during the
project life and is much related to project monitoring. Monitoring
provides the data on which the evaluation is based.
• However, formalized evaluation is undertaken at specified
periods , usually a mid-term and a terminal evaluation.
 Evaluation Cont…
• The aim of evaluation is largely to determine the extent to which
the objectives are being realized.
• The purpose of evaluation is to review the achievements of a
project against planned expectations, and to use experience from
the project to improve the design of future projects and programs
Note:- Evaluation is not limited only to completed projects. It is a
most important managerial tool in on-going projects and rather,
formalized evaluation may take place at several times in the life of
a project. Evaluation may be undertaken when the project is in
trouble as the first step in a re-planning effort.
 2.3. The UNIDO Project Cycle
 The UNIDO has established a project cycle comprising the following three
distinct phases:
• The pre-investment phase
• The investment phase, and
• The operating phase.
1. The pre-investment phase:
Pre-investment phase comprises several stages:
• Identification of investment opportunities (opportunity studies)
• Analysis of project alternatives and preliminary project selection
as well as project preparation (pre-feasibility and feasibility
studies), and
• Project appraisal and investment decision (specialized appraisal
reports)
A. Opportunity Studies
It is the starting-point & may includes;
• Natural resources
• The existing agricultural base
• Future demand for consumer goods
• Imports substitution and export possibilities
• Environmental impacts
• Expansions of existing capacity
• Diversification
B. Pre-Feasibility Studies

• Formulation of a feasibility study that enables a

definite decision to be made on the project is a costly
and time-consuming task.
• Therefore, before assigning larger funds for such a
study, a further assessment of the project idea might
be made in a pre-feasibility study.
• This is to see if:
– All possible project alternatives are examined,
– The project concept justifies detail study,
– All aspects are critical and need in-depth
investigation,
– The project idea is viable and attractive or not.
C. Support/Functional/Studies

This may include:

• Market studies of products
• Raw material and factory supply studies
• Laboratory and pilot plant tests
• Location studies
• Environmental impact assessment.
• Economies of scale studies
• Equipment selection studies
D. Feasibility Studies
• A feasibility study should provide all data necessary
for an investment decision.
• It may include; commercial, technical, financial,
economic, and environment prerequisites for an
investment project.
 2. The Investment/implementation Phase

The investment phase can be divided into 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
• Acquisition of land, construction work and installation
• Recruitment and training of personnel
• Pre-production marketing, including the securing of supplies
and suppliers and setting up the administration of the firm.
• Recruitment and training of personnel
 3. The Operating Phase

• The problem of the operating phase needs to be

considered from both a short and a long-term view
point.
– The short-term view relates to the initial after
commencement of production & concerning such
matters as the applications of production
techniques, operation of equipment, or inadequate
labor productivity.
– The long-term view relates to chosen strategies and
the associated production and marketing costs as
well as sales revenues.
 In Ethiopia
• According to (1990) Development Project Studies Authority
(DEPSA), the project cycle comprises three major phases,
 Pre-investment
 Investment, and
 Operating phase.
• The Guidelines has divided the Project cycle into six stages
as follows:
–Identification
–Preparation
–Appraisal/decision
–Implementation
–Operation
–Ex-post evaluation.