Title: Lecture 7: Basics of Project Planning
1Lecture 7 Basics of Project Planning
2Learning Objectives
- Part 1 Introduce concepts, procedures regarding
the analysis of agri/aquaculture projects - Part 2 Sources of funding and tactical
objectives
3The Project Concept
- All projects suffer from poor preparation
- Project planning identifies national, regional
and/or company goals - selects priority areas of development (hatchery,
farm, processing plant?) - designs effective pricing policies
- mobilizes necessary resources
4Why is Planning Required?
- Waste is a tragic loss to poor countries
- Projects are typically underestimated with
respect to time and effort - When money sits in a bank, the bank does not
care, you still have to pay debt service - He who hesitates is lost.
5What is a Project?
- Definition the whole complex of activities
using resources to gain benefits - investment activity cash, equity, long-term
financing - financial resources are expended
- capital assets are created
- benefits hopefully appreciate over time
6Characterizing Aquaculture Projects
- Two types economic development and private
company (firm) type - large scale economic development type projects
are part of a large program (e.g., World Bank
irrigation projects) - can even be divided into smaller subprojects
(e.g., CJEDP) - usually involve local counterparts
- sometimes funded and administered by two
different governments
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8Private Investment (Firms)
- Usually small, minimum size from a financial
standpoint - technologically, administratively feasible
- specific starting point and end point
- specific objectives
- boundaries and clientele clearly defined
- wholly independent administrative structure
- funded through a mix of cash, equity, long-term
financing
9Project Planning
- Most important factor is to have good planning
- information includes potential and ongoing
investments in the area - What effect will these investments have on
growth? How will they affect your project? How
much can be spent over duration of the project? - What resources are available for specific
investment?
10Project Planning
- Projects are usually selected based in part on
numerical indicators of value of costs and
returns (ROI, NPV, IRR, etc.) - large-scale projects look at the same as above,
but also national income, income of typical
farmer - the typical yardstick might be market price
(actual price at which goods and services are
traded) - sometimes market price is not used instead, a
better indicator of value (shadow price) is used
(shadow price value based on scarcity of the
resource)
11Project Planning
- Good planning also helps provide financial
assistance to both types of projects - large-scale projects often concentrate on
investment from outside sources (e.g., the World
Bank) - often suggested they also look at local
assistance (local development banks) however,
criteria are different - small-scale projects often have to look both
inside the country and outside - Homework come up with a concept/name for your
project, create a list of possible funding
sources available to aquaculture projects
12Project Planning Targets
- Large-scale projects target broader implications
than private investment projects (e.g., social
benefit, national income) - helpful to scrutinize just what are the policy or
production targets - in large-scale projects, the issue of planning is
often complicated by a need to coordinate with
other plans and investments - both project types must consider scarcity of
investment funds, foreign exchange rates, labor
issues, etc.
13The Project Format - Its Advantages
- Advances/assesses by organizing info from many
sources - gives ideas on cost, year by year, effects on
participants, possible incentives - allows better judgement re-organization,
administration problems are faced head-on - gives mgrs/planners better criteria for
monitoring progress/implementation - encourages checking-out other alternatives
- controls reliability of data
- format well-suited to production projects
w/clear-cut investments, valued costs/benefits
14Project Preparation and Analysis
- Only when all the aspects of a project are taken
into consideration can its financial impact be
truly realized - Why? - All elements are inter-related
- Judgements about one affect the other
- As project analysts, your job is to continually
question technicians as to whether all aspects
have been considered
15The Project Cycle
- Five phases
- 1) identification (finding the project)
- 2) prep/analysis (Does it have merit?)
- 3) appraisal (critical review, independent)
- 4) implementation (getting it started)
- 5) evaluation (success or failure)
16Identification Phase
- Involves finding individual projects
- usually identified by technical specialists,
sometimes politicians - sometimes identified from other proposals to
extend on-going programs - suggestions often arise due to present or
anticipated lack of supply of some product - can be identified via common knowledge, market
trends, import statistics - also by existing EDPs, bank reports, etc.
17Preparation/Analysis Phase
- This includes all work done to bring the project
to the point of appraisal - first step feasibility study or business plan
- these documents define objectives, suggest
alternatives, indicate most efficient plan,
convince - includes a preliminary financial or economic
analyseis (better now vs. later) - nothing moves forward without financials
18Preparation/Analysis Phase
- Business plans and feasibility studies take time
and money - business plan about two months
- feasibility study compares projects, longer
- costs are as high as 10 of project value
- regained as improved ROI
- undertaken by special team of consultants
19Appraisal Phase
- Critical review, independent evaluation
- re-examines every aspect of the project plan to
assess its logic/value prior to release of big
money - may involve new information
- required by most funding agencies
- feasibility study read/approved by someone
outside the agency
20Implementation Phase
- Objective of previous phases is to have a project
that can be implemented to the benefit of
recipients - the better and more realistic the project plan,
the easier to implement - more likely it will be successful or beneficial
- implementation needs to be flexible, though,
considering changes in prices and technology - the greater the uncertainty or novelty of the
project, the more changes will occur
21Evaluation Phase
- This phase regards evaluation of success or
failure elements of a project with relevance to
the future - usually takes place throughout the project, but
sometimes only at the end - undertaken by sponsoring company, agency, etc.
- some projects have separate internal units for
this or use outsiders - Are or have objectives being/been met? If not,
were the objectives realistic?
22Evaluation Phase
- Was the technology proposed appropriate?
- Were the institutional, management arrangements
suited to the conditions? - Were the financial aspects carefully worked out?
- Were the economic aspects carefully explored?
- Did management quickly respond to changes?
- Was its response carefully considered and
appropriate? - How could the projects structure be changed to
make it more flexible?
23Accuracy of Project Analysis
- They are supposed to be the basis for investment
decisions however - How accurate are they in foretelling future
results? - Usually take the shape of performance reviews at
end of implementation phase - typical indicator is ROI
- most EDPs yield 20-25 returns
- however, ROI is misleading due to changes in
prices - poor financial predictability is the result of
inappropriate technology, poor management, delays
24Why Projects Often Go Wrong
- When analysis fails to predict project success,
it is likely due to poor project design and
faulty implementation - projects are then typically audited to determine
the reasons for poor performance - inappropriate technology
- inadequate support systems/infrastructure
- failure to appreciate social environment
- administrative problems
- adverse policy environment
25Part 2 Sources of Funding
26Learning Objectives
- Strategic policy objectives in setting up
projects - Investment strategies
- Tactical objectives
- Sources of funding
- Investment appraisal methods, indices
27Introductory Comments
- Setting up an aquaculture project typically
requires substantial investment - financial implications must be addressed well in
advance - we will look at the likely costs of such projects
- focus on ideas which are most critical
28Strategic/Policy Objectives of Aquaculture
Projects
- Governmental agencies social benefit, national
income via increased taxation - Development agencies social benefit, securing
of resources - others attracting foreign investment, improving
balance of trade, transmigration - aquaculture investors, analysts must weigh the
good against the bad
29Socio-economic benefits derived from an
aquaculture project
Individual
Improved Std. Of Living
Income
Family
Employment
Municipal
Taxes
National/Community Development
National
AQUACULTURE PROJECT
Import Substitution
Foreign Exch. Savings
Domestic Market
Supply of Product
Additional Supply
Lowering of Prices
Production
Export Market
Increased Foreign Exchange Reserves
Stimulation of Economy
Demand for Materials
Domestic Market
30How Aquaculture Projects Attract Foreign
Investment
- Relaxing exchange controls
- flexibility in foreignlocal joint ventures
- simplifying legal requirements/red tape
- providing training, information, support
- promoting auxiliary industries (feed mills,
processing plants, etc.) - cutting duties on imports of equipment and raw
materials - providing tax holidays during implementation
phase - permitting repatriation of profits/assets
- providing infrastructure (aquaparks)
31Investment Strategies
- Private ventures range in size from large,
vertically integrated firms to small backyard
operations - single common element profit
- investment decisions vary dependent upon scale
- large companies usually look at long-term trends,
look at product cycling - sometimes invest in unprofitable pilot projects
in order to receive better future return
32Investment Strategies smallholders
- Aquaculture often serves as an alternative to
other activities - examples agriculture, salt production
- switching to aquaculture almost always means loss
of income from established crops - low risk culture practices are often used to
keep impact to a minimum - focus is on profitability of each run
- farmer needs other occupation, income to cover
periods of no aquaculture activity
33Aquaculture and Farm Income
- Introducing aquaculture to smallholders can help
raise their income - however sources of inputs (fry) must be
available - markets must be accessible
- usually finfish production can produce greater
yields for less input (more forgiving) - crustacean culture requires higher costs for
lower yields - finfish production techniques are simpler
- lower value of finfish also keeps it in local
markets
34Overlap Between Private Sector and Public Sector
- Allows for cooperation and coordination of effort
- government hatcheries are good example
- contract growing schemes (nucleus estate
planning) - passing of laws specific to aquaculture
- organization of meetings, conferences, seminars
35Tactical Development Objectives
- Often specified with respect to desired rate of
return (ROI) - other criteria used net profit before taxes,
cashflows, net present value - returns reflect the sources of and cost of the
capital employed - the cost of risk venture capital or equity
depends upon return expected by shareholders
36Tactical Objective debtequity
- Cost of funds borrowed from a funding/loan
institution vary according to interest rates,
duration, size of loan - cost of loans is less than the cost of risk
equity - average cost of capital is dependent upon
gearing ratio (debtequity ratio) - when interest rates are low, D/E ratio is high
- equity-based companies do better when interest
rates are high
37Tactical Objectives rate of return
- What is an appropriate rate of return?
- Aquaculture represents risk and is hazardous
compared to other ventures - therefore it must generate higher than normal
returns to be attractive/worthwhile - most banks look at 20-25 ROI as favorable
- other option is to assign a risk premium of 5
over normal return - the higher the intensity or more untried the
technology, the higher the risk premium
38Funding Sources
- There are two basic sources of funding 1)
capital assistance and 2) private investment - capital assistance loans, grant aid, cash
grants - for developing nations, this comes from external
loans (World Bank, Commonwealth Development
Corporation, Banco International de Desarollo,
etc.) - grant aid USAID, UNIDO, WHO, Swiss, Japanese,
Norwegians - developed countries subsidies and enterprise
grants
39Funding Sources capital assistance
- Most loans provided are low interest rate,
extended repayment, concessionary in nature - high percentage of Asian Development Bank loans
are for aquaculture - around 10 of all aquaculture loans are via the
World Bank - grant-aid/grants are not paid back, real benefit
is in reducing trade imbalances - assistance is often provided in form of technology
40Funding Sources credit institutions
- These sources are typically accessed by
smallholders - consist of agricultural, fisheries and
cooperative banks with numerous branches - small loans are provided promptly with minimum
bureaucracy - some technical and marketing assistance provided
- briefing to farmers on purpose and use of credit
should also be provided (not often)
41Funding Sources private investment
- Can be foreign or domestic
- private or public sale of equity (shares/stock)
- backed up by commercial financing
- sometimes referred to as venture capital or
equity - venture capital available through specialized
companies (CAIM) - they expect high rates of return and consider
capital needs of aquaculture firms typically too
small
42Funding Sources venture capital
- Criteria include annual growth rates of 25-50
- pre-tax margins of at least 35
- minimum ROI of at least 30
- public offering of stock in 5-8 years
- must be unique technology
- 30 ownership of project by venture capital firm
- minimum investment of around 500,000
- exit strategy on public sale of 4-7x
43Funding Sources public sales
- Accomplished through offering of sales
- large publicly-traded companies offer shares for
sale, but often not in reference to only their
aquaculture efforts - aquaculture is considered a diversification
44Funding Sources joint ventures
- Developing nations have attracted foreign
investment via aquaculture - Why? Land is cheaper, labor cheap, favorable
climate - often this is an arrangement between a local
owner and foreign investor - production targets the export market due to
limited local market (product too expensive) - regulations as to percentage ownership vary
45Funding Sources joint ventures
- Many joint ventures with foreigners call for
foreign partner providing technical expertise - if technical expertise has no experience within
country, project usually started as a pilot - only if technical experts are really experienced
should construction start immediately - site must achieve recommended criteria
46Funding Sources joint ventures
- Most loan institutions consider cash king
- consultants taking an equity position can seldom
convince them to recognize their consulting rates - equity fund/venture capital partners are very
skeptical of anything but cash - they will want to see the company established,
land purchased, business plan, financials,
distribution of shares, compensation packages,
etc. prior to taking the plunge
47Evaluating Joint Venture Partners
- Partners can be cash or in-kind (e.g., land)
participants - if in-kind (sweat equity), the value of shares
is often less than par value - if parnters come in late, they dont receive a
11 (par) disbursement of shares - if land is to be used as equity, have it
appraised by three parties your own appraiser,
the land owners appraiser, and by a neutral
third-party (take the average)
48Other Funding Issues
- Aquacultures bad track record on debt service,
loan payback (examples) - simple ignorance of aquaculture on part of
funding agencies - most companies go bankrupt due to lack of cash
(undercapitalized), not lack of profits - financial crisis often result in rapid failure,
whereas biological crisis can be solved - recognition of adequate funds for implementation
phase is critical