Lecture 7: Basics of Project Planning

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Lecture 7 Basics of Project Planning
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Learning Objectives

• Part 1 Introduce concepts, procedures regarding
  the analysis of agri/aquaculture projects
• Part 2 Sources of funding and tactical
  objectives

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The 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

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Why 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.

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What 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

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Characterizing 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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Private 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

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Project 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?

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Project 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)

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Project 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

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Project 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.

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The 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

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Project 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

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The 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)

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Identification 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.

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Preparation/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

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Preparation/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

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Appraisal 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

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Implementation 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,
  consider- ing changes in prices and technology
• the greater the uncertainty or novelty of the
  project, the more changes will occur

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Evaluation 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?

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Evaluation 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?

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Accuracy 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

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Why 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

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Part 2 Sources of Funding
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Learning Objectives

• Strategic policy objectives in setting up
  projects
• Investment strategies
• Tactical objectives
• Sources of funding
• Investment appraisal methods, indices

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Introductory 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

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Strategic/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

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Socio-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
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How 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)

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Investment 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

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Investment 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

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Aquaculture 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

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Overlap 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

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Tactical 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

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Tactical 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

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Tactical Objectives rate of return

• What is an appropriate rate of return?
• Aquaculture represents risk and is hazardous
  compared to other ventures
• higher returns needed to be 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

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Funding 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

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Funding 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
• 10 of all aqua- 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

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Funding Sources credit institutions

• Typically accessed by small holders
• Consist of agricultural, fisheries and
  cooperative banks with numerous branches
• Small loans promptlyminimum bureaucracy
• Some technical and marketing assistance provided
• Briefing to farmers on purpose and use of credit
  should also be provided (not often)

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Funding Sources private investment

• Can be foreign or domestic
• private or public sale of equity (shares/stock)
• backed up by commercial financing
• A.K.A. venture capital or equity
• venture capital available through specialized
  companies
• they expect high rates of return and consider
  capital needs of aquaculture firms typically too
  small

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Funding 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

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Funding 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 (ADM
  doesnt have to grow fish!)

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Funding 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

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Funding 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

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Funding 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

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Evaluating 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)

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Other 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