Project Life Cycle and Phases

Risk ManagementBy Abigail Pugal Somera

To be able to understand the phases of a Project Life we

first have to understand the different interpretations of a

Project Life Cycle as interpreted by different global organizations that deal with

governments.

Project Life Cycle• ADB Project Cycle Country

Partnership Strategy / Regional

Cooperation Strategy

Preparation

ApprovalImplementation

Completion /

Evaluation

Project Life Cycle• World Bank Project Cycle

Country Assistance

Strategy (1)

Identification (2)

Preparation, Appraisal and Board

Approval (3)

Implementation and

Supervision (4)

Implementation and

Completion (5)

Evaluation (6)

ComparisonCycle Order ADB World Bank

1 Country Partnership Strategy / Regional Cooperation Strategy

Country Assistance Strategy

2 Preparation Identification

3 Approval Preparation, Appraisal and Board Approval

4 Implementation Implementation and Supervision

5 Completion / Evaluation

Implementation and Completion

6 Evaluation

Phases of the Project Cycle

I. Pre – Investment

II. Investment

III. Operations

IV. Evaluation

Support Studies:• Opportunity Study• Pre-feasibility Study• Feasibility Study• Appraisal and Decision

Negotiation and ContractingEngineering Design• Construction and Training• Start-up

How to Identify Investment Projects

• Objective/s:• Find Promising Business Opportunities• Screen According to Criteria• Classify for Further Study or Later Consideration

• Characteristics:• Preliminary Information from Knowledgeable Individuals and Promotion Agencies

Project Identification ProcessDevelop Selection Criteria

Screen Ideas vs. Criteria

Acceptable?

RejectReworkLater

Reconsider

Further Study

Scan Sources of Ideas and

Lists

Profile Readily Available Data

YES

NO

Where to find Project Ideas?• Investment

Opportunities• Demand• Linkages• Problems• Resources• Development• Trade• Technology• Government Policy• External Constraints

• Sources of Ideas• National, Regional Development Plans• Sector Studies• Local Resource Studies• Other Countries’ Experience• Product Classification Lists

Basis for ScreeningProjects

• Size and Growth of Market• Local Resources• Plant Size• Appropriate Technology• Size of Investment• Estimated Financial Indicators• Requirements and Constraints

Screening Criteria

• Varies according to Investigator• Investor•Lender

• Risk of All Concerned

Key Aspects of Identification

• Set-up Screening System to Measure Long-Term Potential

• Concentrate on Best Prospects

• Quick Negative Decision Better than Delay

• Assure Commitment of Potential Sponsor to Implementation

What Constitutes a Business Opportunity?

Micro• Business Concept• Investors• Market• Resources• Entrepreneur• Criteria

SatisfactionMacro• Business

Climate• Business Cycle• Economic

Trend

RISK

Allocation of Investment Resources

Pre-Investment Studies

Progressive DevelopmentS

UPPO

RT S

TU

DIE

S

PROJECT IDENTIFICATION

OPPORTUNITY STUDY

PRE-FEASIBILITY STUDY

FEASIBILITY STUDY

APPR

AIS

AL

ITER

ATIO

NS

IMPLEMENTATION

IDENTICAL SCOPE AT ALL LEVELS, INCREASING

ACCURACY AND PRECISION

Information Flow Diagrams• Related to preparation of investment studies

C• Collecting

O• Organizing

P• Processing

A• Analyzing

Content of Pre-Investment Study

• Executive Summary• Project Background and Basic Idea• Market Analysis and Marketing

Concept• Raw Materials and Supplies• Location, Site and Environment• Engineering and Technology• Organization and Overhead Costs• Human Resources• Implementation, Planning and

Budgeting• Financial Analysis and Investment

Appraisal

Opportunity Study

Objectives:• Refinement of Business Idea• Preliminary Evaluation of Alternative Approaches• Preliminary Assessment of Strengths and

Weaknesses of Concept

Characteristics:Sketchy, Based more on rough aggregate estimates

than on detailed analysis

Pre-Feasibility Study

Objectives:• Preliminary Project Assessment• Identify Project Alternatives• Identify Critical Aspects that Require Special

Support Studies

Characteristics:Intermediate Level of Detail Based Primarily on

Secondary Data

Feasibility StudyObjectives:

Provide Commercial, Technical, Financial and Economic Information Needed for Investment Decision-Making

Characteristics:• Clear Project Concepts and Criteria• Comprehensive Project Design• Reliable Information, Often Primary Data• Quantified Prediction or Performance• Detailed Analysis with High Confidence Level• Consistent and Defensible Conclusion

Support Studies

Objectives:Provide Detailed Technical Analysis of Critical

Design Features

Characteristics:• Limited Scope• Performed by Technical Experts• Answer Key Questions• Degree of Rigor Commensurate with Stage of

Project Development

Types of Support Studies

• Markets• Inputs• Location• Technology• Equipment

Comparing Project Characteristics with Criteria

Project Appraisal

Who Needs an Appraisal?• All Sectors of Economy• Revenue and Non-revenue Projects• All Types of Projects• New Investment• Modernization• Expansion• Privatization• Technology Acquisition• Equipment Replacement

• Public and Private Investment

Why do we need an Appraisal?

• Commitment of Scarce Resources

• Expectation of Future Benefits

• Inherent Uncertainties

Who’s Perspective do we need to Cover?

Sample Participants’ Concerns

PARTICIPANT

INVESTOR

FINANCIER

REGULATOR

GUARANTOR

SUPPLIER

Commercial

1 2 2 1 2

Market 1 2 2 1 2

Technology

1 2 2 2 2

Finance• Return 1 2 2 2 2

• Liquidity

2 1 3 1 1

• Debt Service

2 1 3 1 2

Economy 3 3 1 3 3

1 VERY IMPORTANT2 SOMEWHAT IMPORTANT3 NOT SO IMPORTANT

Sponsor’s Perspective• Is it compatible with other Investment

Activities?

• Is the Project potentially bankable?

• Does the project make the best use of the Sponsor’s Resources?

• Do I have the capacity to energize the project and to retain its momentum in the face of obstacles to growth?

Foreign and Local Partners

Local Partner

(on the ability of Foreign Partner to contribute more equity)

• “He can afford it.”

• “The exchange rate is wrong.”

• “He wants our market.”

Foreign Partner

(on the reason to offer lower price for participation)

• “Political and Economic Risk”

• “Low Purchasing Power in the Marketplace”

• “Uncertain Future Earnings”

• “Workers’ Demands”

• “Book Value is Irrelevant”

Macro – Micro Appraisal

MICRO

Project Level

COMMERCIAL PROFITABILITY

MACRO

National Level

NATIONAL PROFITABILITY

At the National Perspective• Does the Project Make Sense for the Country?

• Consistent with Development Goals?

• Positive Impact on Macro-economic Indicators?

• Satisfy Economic Rate of Return Criterion?

The Appraisal Report

• Purpose• Project Background• Analysis of•Commercial / Market•Technology•Environmental Impacts• Institutional / Managerial•Financial•Economic and Social

• Conclusion

Commercial / Market

• Is it a Sound Business

Concept?• Is there a Market for Product

/ Service?

• Is the Marketing Strategy

Viable?

• Are the Sales Projections

Realistic?

• Is the Distribution Plan

Viable?

Technology

• Is the production at a competitive price?

• Is the process technology accessible?

• Are the operating conditions sustainable?

• Will we be able to provide the quality demanded

by the market?

• Are the inputs to the planning reliable?

• Are there adequate technical personnel?

Environment

• Do process emissions and effluents meet or exceed regulated standards?

• Are products environmentally acceptable?

• Do impacts indicate future regulatory actions?

Institutional / Managerial• Are the following Competent?• Entrepreneur• Implementation Management• Operations Management

• Is the organization capable of executing necessary functions?

Financial• Are the financial resources adequate to

planning?

• Will there be adequate returns to the

investor?

• Are the financial criteria of other

participants satisfied?

• Are the financial risks and risk sharing

acceptable?

• Is the financial structure acceptable?

Caution for the Appraiser• Wrong Timing• Non-optimal Financing• Over-estimated Market Potential• Under-estimated Capital Cost• Under-estimated Competition• Planned Capacity Inconsistent with

Market• Unidentified Sources of Skilled

Personnel• Inadequate Infrastructure• Project Design Alternatives• Ineffective Planning

Risk Management

Risk Management - Defined• The process of identification, analysis and either

acceptance or mitigation of uncertainty in investment decision-making.

• Occurs anytime an investor or fund manager analyzes and attempts to quantify the potential for losses in an investment and then takes the appropriate action (or inaction) given their investment objectives and risk tolerance.

• Inadequate risk management can result in severe consequences for companies as well as individuals. For example, the recession that began in 2008 was largely caused by the loose credit risk management of financial firms.

Elements of Risk Management

Any project organization is subject to risks. One which finds itself in a state of perpetual crisis, is failing to manage risks properly.

Failure to manage risks is characterized by inability to decide what to do, when to do it, and whether enough has been done.

Risk Management is a facet of Quality, using basic techniques of analysis and measurement to ensure that risks are properly identified, classified, and managed.

Elements of Risk Assessment• Identify Uncertainties

Explore the entire project plans and look for areas of uncertainty.

• Analyze Risks

Specify how those areas of uncertainty can impact the performance of the project, either in duration, cost or meeting the users' requirements.

• Prioritize Risks

Establish which of those Risks should be eliminated completely, because of potential extreme impact, which should have regular management attention, and which are sufficiently minor to avoid detailed management attention.

Elements of Risk Control• Mitigate Risks

Take whatever actions are possible in advance to reduce the effect of Risk. It is better to spend money on mitigation than to include contingency in the plan.

• Plan for Emergencies

For all those Risks which are deemed to be significant, have an emergency plan in place before it happens.

• Measure and Control

Track the effects of the risks identified and manage them to a successful conclusion.

How to Minimize Risk

Effective Risk Management

References• UNIDO Methodology for the Identification, Prepara

tion and Evaluation of Investment Projects, Costa Rica, Sept 23-27, 2002

• http://www.investopedia.com/terms/r/riskmanagement.asp

• http://www.netcomuk.co.uk/~rtusler/project/principl.html