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Project Life Cycle and Phases
Risk ManagementBy Abigail Pugal Somera
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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.
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Project Life Cycle• ADB Project Cycle Country
Partnership Strategy / Regional
Cooperation Strategy
Preparation
ApprovalImplementation
Completion /
Evaluation
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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)
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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
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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
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How to Identify Investment Projects
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• 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
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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
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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
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Basis for ScreeningProjects
• Size and Growth of Market• Local Resources• Plant Size• Appropriate Technology• Size of Investment• Estimated Financial Indicators• Requirements and Constraints
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Screening Criteria
• Varies according to Investigator• Investor•Lender
• Risk of All Concerned
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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
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What Constitutes a Business Opportunity?
Micro• Business Concept• Investors• Market• Resources• Entrepreneur• Criteria
SatisfactionMacro• Business
Climate• Business Cycle• Economic
Trend
RISK
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Allocation of Investment Resources
Pre-Investment Studies
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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
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Information Flow Diagrams• Related to preparation of investment studies
C• Collecting
O• Organizing
P• Processing
A• Analyzing
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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
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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
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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
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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
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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
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Types of Support Studies
• Markets• Inputs• Location• Technology• Equipment
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Comparing Project Characteristics with Criteria
Project Appraisal
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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
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Why do we need an Appraisal?
• Commitment of Scarce Resources
• Expectation of Future Benefits
• Inherent Uncertainties
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Who’s Perspective do we need to Cover?
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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
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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?
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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”
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Macro – Micro Appraisal
MICRO
Project Level
COMMERCIAL PROFITABILITY
MACRO
National Level
NATIONAL PROFITABILITY
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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?
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The Appraisal Report
• Purpose• Project Background• Analysis of•Commercial / Market•Technology•Environmental Impacts• Institutional / Managerial•Financial•Economic and Social
• Conclusion
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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?
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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?
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Environment
• Do process emissions and effluents meet or exceed regulated standards?
• Are products environmentally acceptable?
• Do impacts indicate future regulatory actions?
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Institutional / Managerial• Are the following Competent?• Entrepreneur• Implementation Management• Operations Management
• Is the organization capable of executing necessary functions?
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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?
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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
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Risk Management
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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.
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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.
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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.
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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.
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How to Minimize Risk
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Effective Risk Management
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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