Chapter Two

The Project Cycle

2.1. What is project Cycle?
The way in which projects are planned and carried out follows a sequence that has become
known as the project cycle. The cycle starts with the identification of an idea and develops that
idea into a working plan that can be implemented and evaluated. Ideas are identified in the
context of an agreed strategy. It provides a structure to ensure that stakeholders are consulted and
relevant information is available, so that informed decisions can be made at key stages in the life
of a project.
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. The planning
process does not contain such a stringent sequence of events since all the aspects of the project
have to be considered simultaneously and, if necessary, adjusted to one another. Therefore, a
project cycle is a self-renewing cycle in that new projects may grow out of the old ones in a
continuous process and self-sustaining cycle of activity.

These processes can usefully be considered as a comprehensive sequence in the sense that for the
project that is implemented, each stage naturally follows the proceeding one and leads on to the
next. Actually, the division into stages is artificial; but it helps us to understand that project
planning, though a continuous process over time, has distinct phases and stages. And therefore,
throughout the project cycle, the primary preoccupation of the analyst is to consider alternatives,
evaluate them, and to make decisions as to which of them should be advanced to the next stage
in the planning process.

Regarding the classification of the aspects for the purpose of project analysis, there are many
equally valid ways in which the project cycle may be divided and the identifiable stages may be
described. There are alternative models that deal with the project cycle. However, in this text,
and exclusively in this chapter, more emphasis will be given to the two basic Models that are
widely accepted as a model of project by institutions, analysts, and mostly dealt in academic
literatures. These are: “The Baum Cycle (also called the World Bank Project Cycle)” and

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“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

A project with the characteristic already outlined above typically run through at least several
separable stages of activities that can be thought of as constituting a definite sequence, which
some writers and institutions have called “a project cycle”. In this regard, the first basic model of
a project cycle developed by 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”. In this version of the Baum model, negotiation comes after projects pass the
appraisal process and become a candidate for realization. It is after appropriate negotiations that
projects become implementation entity. And then, projects that are implemented will be the
concern for evaluation, which usually closes the cycle as it gives rise to the identification of new
projects. This model, therefore, includes a total of six identifiable stages in the project cycle. The
World Bank accepted the amendment and hence, this new version has been in use since then.
Thus, each of Baum’s main stages is discussed briefly below:

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:

 Some may be “resource based” and stem from the opportunity to make profitable use of
available resources.
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  Some projects may be “market based” arising from an identified demand in home or
overseas markets.
 Others may be “need-based” where the purpose is to try to make available to all people
in an area of minimal amounts of certain basic material requirements and services.
 Well-informed “technical specialists” and “local leaders” are also common sources of
projects. 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.
 Ideas for new projects also come from “proposals to extend and/or expand existing
programs and projects” as well as from identifying technological alternatives.

In general, most projects start as an elementary idea. Eventually, some simple ideas are
elaborated into a form to which the title “project” can be formally applied.

2. Preparation:

Once projects have been identified, there begins a process of progressively more detailed
preparation and analysis of project plans. 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 and covers the establishment of commercial, technical,
institutional, financial, and socio-economic feasibility. Decisions have to be made on the scope
of the project, location and site, soil and hydrological requirements, project size (farm or factory
size), etc.

Resource based investigations are undertaken and alternative forms of projects are explored.
Complete technical specifications of distinct proposals accompanied by full details of financial
and economic costs and benefits are the outcome of the project preparation stage. The project
now exists as a set of tangible proposals. Practically, project design and formulation is an area in
which local and international consultants are very active, especially for big projects that cover
large areas and have big budgets.

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 3. Appraisal and Selection:

After a project has been prepared, it is generally appropriate for a critical review or to conduct an
independent appraisal. This provides an opportunity to re-examine every aspect of the project
plan and determine whether the proposal is appropriate and sound or not before large sums are
committed. Generally, internal government staffs only are used for this work and not consultants
and projects are appraised both in the field and at the desk level. Appraisals should cover at least
seven aspects of a project, each of which must have been given special consideration during the
project preparation phase:

a. Technical: here the appraisers concentrate in verifying whether what is proposed will
work in the way suggested or not.
b. 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.
c. 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.
d. Incentive: the appraisers see to it whether things are arranged in such a way that all those
whose participation is required will find it in their interest to take part in the project, at
least to the extent envisaged in the plan.
e. Economic: the appraisers here try to see whether what is proposed is good from the
viewpoint of the national economic development interest, all project effects (positive as
well as negative) are taken into account, and check if all are correctly valued.
f. 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. Moreover, it tries to
see if the responsible are given sufficient power and scope to do what is required.
g. Organizational: the appraisers examine the project it is organized internally and
externally into units, contract, policy, institution, etc so as to allow the proposals to be
carried out properly and to allow for change as the project develops.

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The appraisal process builds on the project plan but may involve new information if the appraisal
team feels that some of the data used at preparation or some assumptions are faulty. The
implications of the project on the society and the environment are also more thoroughly
investigated and documented. Similarly, the technical design, financial measures, commercial
aspects, incentives, and economic parameters are thoroughly scrutinized. These issues are the
subjects of specialized appraisal report. 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, that is, comment made at the appraisal stage frequently give rise to
alternations in the project plan (project appraisal).

After appraisal, the viable project proposals are chosen for implementation on the basis of the
priorities of the stakeholders and the available resources. For instance, Treasury may impose a
ceiling on the ministries with a big portfolio of investments, calling for prioritization of the core
and lower priority projects. In practice, there can be quite a sequence of project selection
decisions. Following appraisal, some projects may be discarded. If the project involves loan
finance, the lender will almost certainly wish to carry out its own appraisal before completing
negotiations with the borrower.

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. Implementation:

The objective of any effort in project planning and analysis clearly is to have a project that can
be implemented to the benefit of the society. Thus, implementation is, perhaps, the most
important part of the project cycle. In this stage, funds are actually disbursed to get the project
started and keep running. A major priority during this stage is to ensure that the project is carried

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out in the way and within the period that was planned. Problems frequently occur when the
economic and financial environment at implementation differs from the situation expected
during appraisal.

Frequently, original proposals are modified, though usually only with difficulty, because of the
need to get agreement between the parties involved. It is during implementation that many of the
real problems of projects are first identified. Because of this, the feedback effects on the
discovery and design of new projects and also the deficiencies in the capabilities of the project
actor can be revealed. Therefore, to allow the management to become aware of the difficulties
that might arise, recording, monitoring, and progress reporting are important activities during the
implementation stage.

Some of the aspects of implementation that are of particular relevance to project planning and
analysis are the following:

 The first is that, the better and more realistic a project plan is, the more likely it is
that the plan can be carried out and the expected benefits realized.
 The second is that, project implementation must be flexible. Circumstances will
change and project managers must be able to respond intelligently to these
changes. The common ones are: technical changes (soils, water logging, and
nitrogen application); price changes; economic policy and environmental changes;
political changes, etc. and these all will alter the ways in which projects should be
implemented.
6. Evaluation:

The final phase in the project cycle is evaluation. Once a project has been carried out, it is
often useful, (though not always done), to look back over what took place, to compare actual
progress with the plans, and to judge whether the decisions and actions taken were
responsible and useful. The extent to which the objectives of a project are being realized
provides the primary criterion for an evaluation. The analyst looks systematically at the
elements of success and failure in the project experience to learn how better to plan for the
future.
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 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. Careful evaluation should precede any effort to plan for new projects and
it is also needed to follow-up the progress of projects. And, finally evaluation should be
undertaken when a project is terminated or is well into routine operation.

Different groups or units may do the evaluation of projects. Among others,

 Project’s management unit often continuously evaluates its experience as

implementation proceeds.
 The sponsoring agency, perhaps, the operating ministry, the planning agency, or an
external assistance agency may undertake evaluation.

In large and innovative projects, the project’s administrative structure may provide a separate
evaluation unit responsible for monitoring the projects implementation and for bringing
problems to the attention of the projects’ management. Evaluation can help not only in the
management of the project after the initial phase, but also help in the planning of future projects.
Experience with one project can give rise to new ideas for extension of the project, repetition, the
need for “vertically” associating projects that supply inputs to or process products from this
project, and other ideas which become the seeds to generate new project proposals.

2.3. The UNIDO Project Cycle

The UNIDO has established a project cycle comprising the following three distinct phases:

1. The pre-investment phase

2. The investment phase, and
3. The operating phase.

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Each of these three phases is divided into stages, some of which constitute important
consultancy, engineering, and industrial (manufacturing) activities. In this regard, increasing
importance should be attached to the pre-investment phase as a central point of attention,
because the success or failure of an industrial project ultimately depends on the marketing,
technical, financial and economic findings and their interpretations, especially in the feasibility
study. To reduce wastage of scarce resources, a clear comprehension of the sequence of events is
required when developing an investment proposal from the conceptual stage by way of active
promotional efforts to the operational stage.

1. The pre-investment phase:

According to the UNIDO manual, the pre-investment phase comprises several stages:

 Identification of investment opportunities (opportunity studies)

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  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)

Support or functional studies are also part of the project preparation stage and are usually
conducted separately, for later incorporation in a pre-feasibility study or feasibility study as
appropriate. Though it is easier to grasp the scope of an opportunity study, it is not an easy task
to differentiate between a pre-feasibility and feasibility study in view of the frequently inaccurate
use of these terms.

The division of the pre-investment phase into stages avoids proceeding directly from the project
idea to the final feasibility study without examining the project idea systematically or being able
to present alternative solutions. This cuts out many feasibility studies that would have little
chance of reaching the investment phase. Finally, it ensures that the project appraisal to be made
by national or international financing institutions becomes an easier task when based on well-
prepared studies. All too often, project appraisal actually amounts to project preparation, given
the low quality of the feasibility study submitted.

(A) Opportunity Studies

The identification of investment opportunities is the starting-point in a series of investment-

related activities, when potential investors (private or public) are interested in obtaining
information on newly identified viable investment opportunities. The main instrument used to
quantify the parameters, information, and data required to develop a project idea into a
proposal is the opportunity study, which should analyze:

 Natural resources
 The existing agricultural base (it may be the basis 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

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  Manufacturing sectors (successful in other countries)
 Diversification

Opportunity studies are rather sketch in nature and rely more on aggregate estimates than on
detailed analysis. Opportunity studies could be general or specific.

 General opportunity studies (“sector approach") could be area studies designed to

identify opportunities on a given area (Administrative province, backward region);
industry studies to identify opportunities in delimited industrial branch; and resource-
based studies to reveal opportunities based on the utilization of natural, agricultural, or
industrial resources.
 Specific project opportunity studies (“enterprise approach”) are seen in the form of
products with potential for domestic manufacture. A specific project opportunity study
may be defined as the transformation of a project idea into a broad investment
proposition.

A project opportunity study should not involve any substantial cost in its preparation, as it is
intended primarily to flashlight the principal investment aspects of a possible industrial
proposition. The purpose of opportunity study is to arrive at a quick and inexpensive
determination of salient facts of an investment possibility.

(B) Pre-Feasibility Studies

The project idea must be elaborated in a more detailed study. However, 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, and
The project idea is viable and attractive or not.

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A pre-feasibility study should be viewed as an intermediate stage between a project opportunity
study and a detailed feasibility study, the difference being in the degree of detail of the
information obtained and the intensity with which project alternatives are discussed. The
structure of a pre-feasibility study should be the same as that of a detailed feasibility study.

(C) Support/Functional/Studies

Support or functional studies cover aspects of an investment project, and are required as
prerequisites for, or in support of, pre-feasibility and feasibility studies, particularly for large-
scale investment proposals. 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

The contents of a support study vary, depending on the type and nature of the projects. However,
as it relates to a vital aspect of the project, the conclusions could be clear enough to give
directions to the subsequent stage of project preparation. In most cases, a support study when
undertaken either before or together with a feasibility study, form an integral part of the latter
and lessen its burden and cost.

(D) Feasibility Studies

A feasibility study should provide all data necessary for an investment decision. The
commercial, technical, financial, economic, and environment prerequisites for an investment
project should, therefore, be defined, refined and critically examined based on alternative
solutions already reviewed in the pre-feasibility study. The results of these efforts is then a
project whose background conditions and aims have been clearly defined in terms of its control
objective and possible marketing strategies, the possible market shares that can be achieved, the
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corresponding production capacities, the palnt location, existing raw materials, appropriate
technology and mechanical equipment and, if required, an environmental impact assessment.

The financial part of the study covers the scope of the investment, including the net working
capital, the production and marketing costs, sales revenue, and the return on capital invested.
Final estimates on investment and production costs and its subsequent calculations of financial
and economic profitability are only meaningful if the scope of the project is defined
unequivocally(clearly) in order not to omit any essential part and its related cost.

There is no uniform approach or pattern to cover all industrial projects of whatever type, size or
category. The emphasis on the components varies from project to project. For most industrial
projects, however, there is a broad format of general application-bearing in mind that the larger
the project the more complex will be the information required. Although feasibility studies are
similar in content to pre-feasibility studies, the industrial investment project must be worked out
with the greatest accuracy in an iterative optimization process, with feedback and inter-linkages,
including the identification of commercial, technical, and entrepreneurial risks.

The sensitive parameters such as the size of the market, the production program, or the
mechanical equipment selected should be examined more closely. A feasibility study should be
carried out only if the necessary financing facilities, as determined by the studies, can be
identified with a fair degree of accuracy. There would be little sense in a feasibility study without
the reliable assurance that, in the event of positive study findings, funds could be made available.
For that reason, possible project financing must be considered as early as the feasibility study
stage because financing conditions have a direct effect on total costs and, thus, on the financial
feasibility of the project.

(E)Appraisal Report

When a feasibility study is completed, the various parties will carry out their own appraisal of
the investment project in accordance with their individual objectives and evaluation of expected
risks, costs, and gains. Large investment and development finance institutions have a formalized
project appraisal procedure and usually prepare appraisal reports. This is the reason why project

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appraisal should be considered an independent stage of the pre-investment phase, marked by the
final investment and financing decisions taken by the project promoters.

The appraisal report will prove whether the pre-production expenditures spent since the initiation
of the project idea were well spent or not. Project appraisal as carried out by financial institutions
concentrates on the health of the company to be financed, the returns to be obtained by equity
holders and the protection of its creditors. The techniques applied to appraise projects in line
with these criteria center around technical, commercial, market, managerial, organizational, and
financial and possibly also economic aspects.

2. The Investment/implementation Phase

The investment or implementation phase of a project provides wide scope for consultancy and
engineering work, first and foremost in the field of project management. 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, 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
 Plant commissioning and start-up

Detailed engineering design comprises preparatory work for site preparation, the final selection
of construction planning and time scheduling of factory construction, as well as the preparation
of flow charts, scale drawing, and a wide variety of layouts.

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During the stage of tendering and evaluation of bids, it is especially important to receive
comprehensive tenders for goods and services for the project from a sufficiently large number of
national and international suppliers of proven efficiency and with good delivery capacity.

Negotiations and contracting are concerned with the legal obligations arising from the
acquisition of technology the construction of buildings, the purchase and installation of
machinery and equipment and financing. This stage covers the signing of contracts between the
investor or entrepreneur, on the one hand, and the financing institutions, consultants, architects
and suppliers of raw materials and required inputs, on the other.

The construction stage involves the site preparation, construction of buildings and other civil
works, together with the erection and installation of equipment in accordance with proper
programming and scheduling.

The personnel recruitment and training stage, which should proceed simultaneously with the
construction stage, may prove very crucial for the expected growth of productivity and efficiency
in plant operations.

Of particular relevance is the timely initiation of marketing arrangements to prepare the

market for the new products (pre- production marketing) and secure critical supplies (supply
marketing).

Plant commissioning and start up is usually a brief but technically critical span in project
implementation. It links the proceeding construction phase and the following operational
(production) phase.

In general, it is to be noted that in the pre-investment phase, the quality and dependability
of the project are more important than the time factor, while in the investment phase, the
time factor is more critical in order to keep the project within the forecast made in the
feasibility study.

3. The Operating Phase

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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 when a
number of problems may arise concerning such matters as the applications of production
techniques, operation of equipment, or inadequate labor productivity owing to lack of
qualified staff and labor. Most of these problems have their origin in the implementation
phase.
 The long-term view relates to chosen strategies and the associated production and
marketing costs as well as sales revenues. These have a direct relationship with the
projections made at the pre-investment phase. If such strategies and projection prove
faulty, any remedial measures will not only be difficult but may prove highly expensive.

The given outline of the investment and operating phases of an industrial project is undoubtedly
an oversimplification for many projects, and, in fact, certain other aspects may be revealed that
even greater short or long term impacts.

There are various ways in which the project cycle may be viewed and portrayed depending on
the purpose, emphasis, and detail required to illustrate. According to the Guidelines to project
planning in Ethiopia (1990) of Development Project Studies Authority (DEPSA), the project
cycle comprises three major phases,

1. Pre-investment
2. Investment, and
3. Operating phase.

Each of these three phases may be divided into stages. The Guidelines has divided the Project
cycle into six stages as follows:

1. Identification
2. Preparation
3. Appraisal/decision
4. Implementation
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 5. Operation
6. Ex-post evaluation.

The pre-investment phase consists of the first three stages, the investment phase includes the
fourth stage, and the operation phase covers the last two stages. The project cycle means the
various stages of information gathering and decision-making, which take place between a
project’s inception and completion.

In reality, these are somewhat artificial, but do serve to emphasize the need to think of project
planning as a process of decision-making taking place overtime. Broadly speaking, what is
important about this process is that it should begin with the identification of number of
alternatives, using existing information and gathering new data in such a way as to limit
alternatives under consideration to those few, which are more promising.

Throughout the project cycle, the primary preoccupation of the analyst is to consider alternatives,
evaluate them, and to make decisions as to which of them should be advanced to the next stage.
In short, the project planning process is essentially a task of eliminating less viable ideas and
alternatives; and in the continuum, planner naturally hopes that the best alternative will emerge.
In this process:

 The results and/or outputs of a given stage serve as the input or part of the input of the
next stage, if it is decided to proceed to the next stage;
 The output or part of the output of one stage may be used as new input (feedback) to
reconsider or revise, where necessary, the result of proceeding stages; and
 Most importantly, the results of the implementation, operation, and ex-post evaluation
stages of a project constitute valuable experienced for the preparation of subsequent
projects provided these inputs are systematically documented and analyzed.

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