Project 1 - A Commercial Fish Hatchery Project in a Mediterranean Country
Following preparation for project formulation (Phase II), the investor returned to the country and signed contracts with local companies for a topographical survey of the site, soil analysis, and water quality analysis respectively. A three-man team from the consultants arrived a month later, which included a hatchery engineer (team leader), a fish culture biologist, and an economist.
The team spent the first week together reviewing the national and regional background of the project (Step 3a) as it related to marine fish farming in the Mediterranean, its projected growth, and need for seed resources, and made a general evaluation (Step 3b). They brought with them much relevant information on the subject and from all information developed a general course of action (Step 3c). They spent time with the investor confirming his needs, and the economist then carried out a market survey to determine the national market for seed and that in the six other countries in the Mediterranean region which were both potential markets and sources of competition (Steps 4a and 4b). His separate report included a market study (Step 5b), a review of the development situation in other countries (Step 5c), a socio-economic review including a study of local labour costs, etc. (Step 4c), and confirmed the general course of action (Step 4c). The investor himself provided all information regarding national and local legislation for aquaculture projects, and current government incentives and support services (Step 6b).
The engineer and biologist spent their remaining three weeks quantifying the project (Step 6b). The biologist produced all biological design criteria for sea bass and sea bream species and, with the engineer, developed the programming infrastructure, and translated this into the facility specification. The topographical survey and water quality analysis were received in the second week, but the soil analysis was only received just before the team left to return home. The team had discussed the project with the investor to summarize their progress before leaving.
In their own offices the team completed the bioprogramming document (Step 6b). The economist's marketing report was a separate attachment. In laying out the schematic design for the site the team identified two options. The nurseries could be located near to the hatchery which was on a flat but elevated area; alternatively, they could be located at sea level to avoid the need to pump large volumes of water uphill but this option would require more of the lower area to be blasted flat to accommodate the nursery tanks. There were also two options for the marketing of seed. The economist reported that a number of farms in the region were anxious to secure regular supplies of seed under contract, with annually negotiated prices, but with penalty clauses for default. The alternative was to sell as available on the open market. His report also stated that two similar hatcheries were being built in France and in Italy (Step 5c), and that the combined production of some 20 million juveniles per annum would be far more than was required in the region for the next ten years.
At their office, the team completed financial analyses for four options (two site lay-outs, and production of five million and three million juveniles per annum), and a brief environmental impact statement to cover the required blasting and discharge of enriched water from the site back into the sea. The team analysed the options (Step 6c) and recommended low production figures of three million juveniles (with service installations built for expansion) to be sold under contract to farmers in the region, and the nursery located at the lower level to avoid high costs of pumping water uphill. The FIRR was marginal until the facility was expanded.
The team leader then returned to the country and presented the prefeasibility study report to the investor, and explained the recommendations.
The procedure had taken eight months.
Project 2 - A Brackishwater Shrimp Farming Project in a Southeast Asian Country
This area-based project concerned the construction and/or rehabilitation of canals and ponds to achieve higher yields of shrimp, and provision of a number of government support services. The TOR required the team to consider a number of areas in two regions of the country and to rank proposals in order of priority (Phase II of the formulation exercise), and to plan to feasibility study level a project for immediate implementation (Phase III).
The review of the national and sectoral background (Step 3a) examined the government's strategy and policies with regard to pond farmers and provision of support services. As a result of previous visits to the country by team members, the government position on a number of these issues was already known. It was confirmed that the government's fisheries development strategy included a large measure of support to pond farmers to bring about an increased production of shrimp through aquaculture. It was also confirmed that this new source of shrimp should be processed, whenever possible, at existing shrimp processing plants. The team visited an existing shrimp research and extension centre, and was shown the different extension methodologies employed.
The team began the major task of general evaluation of the project areas (Step 3b) in each region. From its assessment of the number of pond farmers in each sub-project area, the terrain, physical condition of canals and ponds, yields of shrimp currently attained, and the proximity of processing plants and ice-making plants, the team was able to rank sub-project areas according to collective criteria.
Concurrent with this general evaluation, the team estimated the potential adoption rate of the project by farmers, and considered constraints which might prevent them joining the project and the incentives and assistance required to help them overcome these difficulties (Step 4). To assist the team to identify all people who might be involved in the project (Step 4a), the marketing expert prepared a schematic figure of the distribution channels for fish and shrimp quantifying, whenever possible, the volumes of fish passing through the channels and the price mark-ups at each stage. Before this analysis some of the team expressed concern that the provision of support to farmers to grow shrimp for export would result in a reduction in the supply of milkfish, produced in the same ponds, to local markets. The analysis, however, indicated that the price of milkfish was sufficiently high to keep farmers supplying this sector of the market.
All these evaluations (Step 3a and 4a) and studies (4b) were carried out by the team concurrently but, nevertheless, the team was constrained by lack of time. No use was made of rapid rural appraisal techniques to establish agents' needs and anxieties about the project. In the limited number of discussions which took place with local farmers, leaders of cooperatives, and with local officials of the DOF, the team nevertheless became confident that there would be a high adoption rate. Other than physical constraints, such as the availability of water and depth of ponds, (identified in Step 3b), critical constraints were the low and erratic supply and high cost of shrimp seed, and poor technical knowledge of shrimp farming among pond farmers.
Because of the shortage of time, the team gave little attention to the need of farmers for credit. The team's working hypothesis that farmers would need loans to improve their ponds and purchase inputs was confirmed in discussions with local bank officials in each of the project sub-areas.
The team noted also that marketing arrangements for shrimp might be improved. There was a concentration of buying power in the local processing plants which sometimes held a monopoly position. However, prices obtained by farmers appeared to be reasonable, and this issue was not considered to be a significant constraint. Overcoming it could be left to later.
The team identified a number of possible courses of action (Steps 3c and 4c) depending on the number and location of hatcheries and support facilities, such as feed mills. It then ranked them in order of priority for each sub-project area, and then again ranked the project areas. In addition to the civil engineering work required in each sub-project area, and the hatchery and feed mills, each of the sub-projects included extension services and credit.
The team now considered what could happen in the project area if the project were not implemented (Step 5). In the absence of government intervention, the team concluded that there would not be a significant increase in yields of shrimp and, in the absence of supplies of shrimp from ponds many of the shrimp processing plants would have to close. Furthermore, the value of shrimp which was produced would probably be reduced by poor quality post-harvest control given the difficulty of introducing and operating a collection system over a wide area.
The team made preliminary estimates of the costs and benefits related to each of the sub-projects (Step 6b) and, after analysis (6c), recommended a possible project for financing (6d). As part of the interim report, the team recommended that a national institution should carry out detailed topographic, soil, and water quality surveys (for Step 7) in the selected sub-project areas prior to the commencement of Phase III.
This part of the formulation process had taken three months, of which one month consisted of field work and two months of report writing. (This was the time allowed for project formulation in the budget.)
Project 3 - A Shellfish Farming Enhancement Project in Southeast Asia
At the end of preparation for project formulation, a six-member team assembled in Singapore to undertake the one-year formulation work designed to increase mollusc production and improve its sanitary control in the region.
The team spent the first four months touring the countries concerned, reviewing sectoral backgrounds, likely project areas, and holding meetings (Steps 3a, 3b, and 3c). Possible courses of action, when drafted, occupied 15 pages. The team identified seven species of molluscs for attention, eight first priority geographical areas for production, together with components in research, training, production, extension, sanitary control, depuration, processing and marketing, including a world-wide study of potential export markets for various types of processed products.
Analysis and diagnosis (Step 4) took another eight months. Instruments, targets, and regulator agents (4a), although the same in general in all countries concerned, were different in detail from one country to another. Countries were grouped, therefore, into those with common features. This was complex and took more time than planned. Less time was available, therefore, for analysis (4b), which consequently was not as detailed as desirable. It was clear, however, that the key limiting factor of the project was not biotechnical capability to produce more (in terms of areas, productivity, techniques), or financial and human capabilities (in terms of access to money and know-how), but acceptability of products by consumers both within the region and outside. Distances between areas of production and markets meant that sanitary and quality control were vital for development of consumer confidence in the products. Consequently the courses of action identified by the team (4c) concentrated on ways to achieve this goal.
Assessing the future “without the project” (Step 5) had to be condensed into two months work and was relatively superficial in character. The conclusion was that supply, in the without-project situation, could not be expected to increase by more than an average of 2% over demand brought about by population increase (with variations from one country to the other), and that exports would remain small.
Because of differences between countries, the outline specification for a possible project (Step 6) was an aggregation of six semi-independent national sub-projects, with export components in Malaysia and Thailand only, together with a regional coordination project. For the coordination project, two options were identified, one with two variants and the other with three, depending on the possible combinations of national sub-projects and extent of EEC involvement in both the coordination project and national sub-projects.
The procedure had taken all of the 15 months estimated.
Discussion Topics
Points for discussion concerning the above illustrations might include the following:
the factors which contributed to any change in project concept between Phase I (Preparation for Project Formulation) and the conclusion of Phase II (Reconnaissance and Preliminary Project Design);
the extent to which formulation teams should be flexible towards the original project concepts;
the extent to which the procedures for Reconnaissance and Preliminary Project Design adopted by the teams varied between the projects illustrated;
the advantages/disadvantages of having a fixed timeframe within which to work having regard to the projects illustrated;
causes of concern at this point with regard to each of the projects illustrated;
any weaknesses in the procedures which may have occured.
Project preparation is the second stage of formulation. It has three Phases (III-V), project design, analysis of expected results, and project documentation and submission.
Purpose and Outputs
Project design starts after the project sponsor has reviewed the formulation team's interim report and agreed that work on the project should proceed to the design stage.
The purpose of project design is to plan the project to an appropriate level of detail in terms of the technical specifications, organization structure, scheduling, management arrangements, resource requirements, and cost estimates, in order first, to provide the project sponsor with the information required to make an investment decision, second, to plan the project for implementation.
As noted at the end of Phase II, in private sector projects the project sponsor, by this stage, might have received a prefeasibility study report on which he could invest in the project immediately, and all that would remain would be the planning for implementation, provided local approvals had been obtained. In larger projects the project sponsor may have yet to decide on certain design options and then secure the appropriate approvals, and possibly seek further financing. Public sector projects invariably have to develop the preferred development option much further in the design stage before financial assessments are made.
There are five main outputs of this phase:
Project objectives and targets are specified in detail.
Project components are fully designed.
The overall project phasing and scheduling of individual components are determined.
All required organization structures and management arrangements are fully identified.
Capital and recurrent costs are estimated and a financing plan is worked out.
In project identification the team was engaged in the collection and analysis of information to identify opportunities and, through further analysis, to arrive at the proposed project. This phase, however, is iterative in character, the team checking in more detail the practicality and the probable effectiveness of the preliminary design proposals. In Phase II the team had to ask itself, “Do we understand what needs to be done?” In Phase III the question is, “Are we sure how it will work?”
Typically work is broken down into five steps (Steps 7–11), the contents of which are summarized in Figure 7 and described below.
Figure 7 Phase III. Project design
This Step is mostly relevant to public sector projects where more specific issues have to be answered in response to the preferred development option.
After a project has been designed on a preliminary basis, it is often necessary to obtain more detailed information on certain technical and socio-economic aspects from specialized field surveys. Normally these surveys will have been recommended by the formulation team in its interim report.
Although these surveys would, within the framework of project identification and preparation, be seen as typical activities in preliminary project design and should take place within the identification stage, frequently the reason for their deferment in public sector projects is that they are often costly and, until identified in the interim report, the costs have not been authorized. These surveys are usually referred to as “pre-design studies”. The work is separate from the project design phase and is usually completed before any further step is taken. In most cases surveys are performed by teams independent of the project formulation team, working from TOR established by the team.
Typical surveys in aquaculture projects include the capabilities or limitations of government departments, marketing boards, supply companies, and the types of agents who will be concerned. Of increasing importance are socio-economic and environmental surveys. The former is necessary in many production projects to ensure that the right instrument agents have been identified, that social constraints and opportunities have been clearly delineated, and to obtain sufficient information about the social structure so as to secure the involvement of beneficiaries in project implementation and after. A socio-economic survey may also be required, for example, to establish the costs and earnings and the farm systems employed by small farmers in order to determine the appropriate fish farming systems and their likely attractiveness to small farmers in terms of the net earnings which will be generated, level of risk, etc. Environmental surveys are now almost indispensable and may include, for example, disposal of farm effluents, destruction of ecosystems, or the genetic diversity of natural populations. Also included may be surveys of legislative and other requirements, as in some countries it may take a long time (and involve certain costs) to obtain the necessary permits and licences for operations.
It may also be necessary at this stage to set up market studies from which the results may not be available until later in the design or analysis phases. Alternatively, market studies may be undertaken by a marketing expert as a member of a preparation team during the project preparation mission.
At this stage also, where projects are likely to be dependent on inputs, such as feeds or seed, it is often desirable to establish the conditions under which such inputs will be available.
In production-oriented projects where the selection of sites has to be narrowed down, the surveys may include further site quantification, building on the work carried out in Step 6b.
Surveys may be so extensive or important that it may be decided to postpone the subsequent steps in project planning until the results are available.
When all activities are completed the project formulation team should have available all the information required to carry out project design.
In private sector projects almost all of this work will have been carried out in Steps 4 and 6. Exceptions may be larger projects which have had a broad mandate through reconnaissance and preliminary design. An example is an international company interested in the potential for converting several of its unprofitable sugarcane plantations into aquaculture but not knowing what was feasible. At the end of Phase II the project team might have recommended two plantations as having the greatest potential. The company might then approve the continuation of the work through the design phase in respect of one site.
Differences in Public/Private Sector Procedures (Step 7)The single task of Step 7 is relevant to public sector projects (Models B, C, and D), and may be pertinent to the broader private sector projects (Model A) which have options to analyse in more detail.
This step may occupy only a short time in the formulation team's schedule but it is an important aspect of the formulation process. It marks the end of the main period of data gathering and the beginning of actual project planning. As with Step 7, the tasks of Step 8 are mainly pertinent to public sector projects; in the private sector, the tasks are relevant only to those projects which started with broad objectives and had few specificities with regard to location or species.
Step 8a - Review and redefinition of project objectives
The interval between the submission of the interim report and the start of work on project preparation provides an opportunity for the project sponsor and/or the national planning authorities (and the formulation team) to consider the proposed objectives of the project and its preliminary design.
In this period any of the interested parties may propose modifications to the objectives and the preliminary design. When this occurs, the suggested modifications should be discussed and agreed by the project steering committee, or the relevant official body, prior to the team redefining the project objectives.
This is the last opportunity to review and revise objectives.
The redefinition of objectives may consist of, for example:
a fully detailed statement of the project's intended direct effects (such as, increased yield per hectare, significant increase in a number of small-scale fishfarmers); and indirect impacts (such as, incomes for rural households grouped according to their characteristics);
indications of the approximate magnitude and timing of the project's primary outputs (such as, tons of fish produced by a given year).
This task is particularly important in projects where objectives are quantified into targets. In setting them, the team should think through the entire project process. For example, in meeting a target for trained extension agents the team should take into account the numbers of training instructors, the volume of training materials, the logistics of space, and rates of attrition, etc. In production projects, to meet an objective of X tons of fish or shellfish in a four year period, the team may have to consider the time required to build up the amount of broodstock needed to reliably provide seed to meet production forecasts. When setting the objectives, therefore, the team should be confident that it has the necessary background information. This information should have been obtained during project identification (Steps 3 and 4) and in Step 7 of this Phase. If it has been missed, the team should take time here to collect it.
Step 8b - Specification of project parameters
Decisions must now be taken to establish the four principal parameters of the project. The order and the content of work required to reach the point where decisions can be made for each varies with the type and focus of each particular project. As noted in the chapter on project identification, for projects which are based on a specific idea at the outset (Models A & B), much of the work in this task will have been completed or partially assembled. For others, particularly the general public sector projects (Models C & D), this will not be the case.
The four parameters are:
Demarcation of the project area/zones. For production projects where the precise site has not been identified, the team should undertake a complete quantification of all remaining design options and the bioprogramming components described in Step 6b. For example, in a project with the objective to increase production of molluscs, a number of coastal areas may have been identified in the interim report but final selection of sites within those areas might have depended on (a) water quality and circulation surveys, etc., carried out in Step 7, and (b) bioprogramming to determine potential yields of each site, and costs of supporting services (construction areas, depuration plants, processing plants, etc.).
For other types of projects, such as establishing a regional training centre, similar considerations would apply. In this case the team would follow the bioprogramming formula (substituting numbers of trainees and their needs for biological criteria), and develop the infrastructure requirements and costs.
Selection of project agents. For the most part agents will have been identified and selected in Step 4c, when the project location has been relatively well defined. If, however, the final choice of the site has been dependent on surveys and studies (Step 7), the team must now select the instrument and regulator agents for the project.
One of the problems which may be encountered in production projects is that, in practice, it may only be possible to estimate tentatively the number of producer agents who will participate in the project (the adoption rate). This problem emphasizes the importance of the formulation team having a thorough understanding, by this time, of the local social and economic structures in the project area (Step 4b), and the “identity profile” of individuals most likely to be attracted by the type of farming activity proposed. The problem is less likely to occur in non-production projects, such as research and training, where selection of instrument agents should not present any difficulty.
Confirmation of selected technologies and management practices. This is only applied by the formulation team in public sector projects and concerns the project at farm level. It mostly confirms that the proposed technology meets the needs of the producer agents, in particular its reliability under most conditions, its micro-feasibility and compatibility with farmers' resource base and management constraints, its incentives and attractiveness to users, and its wider implications and affect on agents other than the farmers.
In projects which are specific with regard to location and species, etc., the technology will have been decided in project formulation, and no further work is required. For general projects, options for implementing production may still be dependent on final site selection and specific agents. For example, one site for increased mollusc production might lend itself to raft culture as the location is deep; at others production on the substrate may be more practical because the offshore location is shallow. Even so, these physical conditions may be offset by considerations relating the selected technology to the needs of the target agents. Where the agents are already familiar with raft culture the team may decide to select this technology in preference to utilization and management of mollusc beds on the substrate, even in a shallow area.
This type of judgement is not always easy, as aquaculture as a sector does not have the long traditions which permit ready comparisons of one type of farming technology with another. Relatively easy calculations can be made to select which system is the most feasible, for example, selecting between extensive, semi-intensive, and intensive systems, as the availability of resources is often the deciding factor rather than pure economics. However, choosing the right practice, such as selection between farming with floating rafts and management of seeded beds, or between earthen ponds, cages, and net-pens, or even choosing the combination of species, are much more difficult problems. Good decisions depend upon a thorough knowledge of the technologies available and of the people involved.
Phasing and timing of project activities. This task is relevant to all projects. It is not concerned with the scheduling of the project, which is undertaken later (Step 9d) but with understanding and properly estimating the degree of difficulty, both psychological and physical, which changes proposed by any project may represent to the instrument agents concerned. At the end of project identification the broad thrust of most projects will have been defined. Here the team has to confirm that phasing and timing of the project, and its support components, conform with the direction of change envisaged.
The team might be assisted here by reference to the following set of standard guidelines which were prepared originally for agriculture development projects and are adapted here to aquaculture projects.
Characteristics of Options for Change
Projects which only require adaptation of an aquaculture technology can often achieve their objectives in the short term. Adaptation describes adjustments of any existing production system without significant modifications. As aquatic farming is very site specific, adaptation of production technology is required by almost every production-oriented project. Production practices based on extensive systems are readily adaptable as they require few inputs; semi-intensive systems invariably require adaptations for supplementary feed formulation and seed production, and it may take longer to achieve a project's objectives; finally, intensive systems, because they are more technically advanced and sophisticated, may require prolonged and difficult adaptation.
Projects which require expansion of an existing technology over a greater area can achieve their objectives usually in the short or medium term. In many cases, where profitable farming is taking place, it will be replicated by the private sector without government intervention. In some instances, however, it will be difficult for farmers to convert their existing land or take up new land without support from the government in the form of access to credit, provision of infrastructure, and support services. Some adaptation of technology will also be required to suit the new areas, which will also impose a delay.
Projects which require reorganization, such as significant changes in the production system and marketing of the product, can achieve their objectives in the medium to long term. If, for example, a project intends to convert farmers producing fish for local consumption into farmers producing shrimp for international markets, or a project encouraging displaced lake fishermen to engage in cage farming of fish, it is clear that the socio-economic systems in which they operate will have to undergo a radical change.
Projects which introduce the technology of aquaculture can achieve their objectives only in the very long-term. This is because inevitably there is a slow adoption rate, and for an economic activity to become viable within an economy it has to become of sufficient importance to attract an appropriate level of government support and services from the private sector. For example, the salmon industry in Chile, which first began in the early 1970s, cannot be said to have reached a level of self-sustainability until the late 1980s. During this period the industry received continuous financial and technical assistance from Japan; Fundaçion Chile provided continuous support for research and development, demonstration farms, and marketing; the Government provided fiscal incentives and the appropriate legislative framework; and major commercial interests in the USA and Norway made long-term investment.
Step 8c - Confirmation of the design criteria for detailed project planning
This task, as with the two previous ones in this step, is mostly applicable to public sector projects and to a few broadly defined private sector projects.
In Step 1c the Project Sponsor would have established certain criteria for the proposed project. The team leader should now confirm that these criteria continue to stand as drafted, or whether they have been modified following the submission of the interim report. Once all the appropriate criteria have been established for the last time, the team leader should ensure that each team member is familiar with them so that their work in the design of individual project components (Step 9) is consistent.
Project criteria can be organized conveniently into the following categories to assist this process:
Financial criteria (costs, cost recovery, cash incentives, etc.).
Economic criteria (minimization of resource use, maximization of outputs for which there is a high demand, etc.).
Social criteria (improved access of agents to resources and services, enhancement of self-organization of the sector, etc.).
Environmental criteria (protection of essential biological ecosystems, such as mangrove swamps, effect of effluents on water quality, etc.).
Implementing criteria (complexity and difficulty of tasks versus capabilities, attractiveness, sustainability, etc.).
Step 8d - Preparation of workplans and TOR for the subsequent steps
After the (re)defined objectives and activities of the project have been discussed, and the major criteria have been agreed, the team leader should prepare TOR for each person involved in Steps 9, 10 and 11, and schedule the work. These TOR should:
define individual responsibilities in terms of:
specific outputs,
specific reporting format,
deadline for submission of the first draft, and
identify all interfaces between:
team members,
relevant organizations, groups or individuals outside the team.
Even at this point the team leader should be looking ahead to the preparation of the final project report, and will have determined the main parts of the report, working papers, and technical appendixes. This may best be done by preparing a complete Table of Contents. It is often good practice for the team leader to provide the team members at this time with examples of the type of work which is expected, such as the detail required and its style of presentation.
Differences in Public/Private Sector Procedures (Step 8)The first three tasks of Step 8 are entirely applicable to public sector projects (Models B, C, & D), and only those private sector projects which began with broad or general objectives. The fourth task (8d), is applicable to all projects going into design (Step 9).
As a prelude to Step 9, it is useful for the formulation team to separate components into categories before individual component design. These categories are:
Production components, such as facilities (farms, hatcheries, processing and feed manufacturing plants), which directly create added value;
Production support components, such as facilities and structures (research centres, training schools), and services (research, credit, training and extension, veterinary advice), which enable the production components to add value;
Social support components, such as infrastructure (housing, potable water, meeting facilities), and services (education, health services, community groups, savings and loans schemes), which are not essential for economic success in the same way as other project components but which contribute to improving the quality of life in the project area/sub-sector. These exist only to a small extent in aquaculture development.
Technical assistance, which is a support service of limited duration but is treated conventionally as a separate component in project formulation (Step 10b).
The project design should provide sufficient information about each activity so that it serves as a comprehensive reference document, and predicts, as accurately as possible, costs and their timing. However, as with Step 6, there is an important difference between the level of design of each component for projects in the public sector and the private sector.
In public sector projects of a general nature, for example a project to support small-scale pond farming, the design of most support components, social support components, and technical assistance components is not carried out too rigidly because, as has been noted, there are uncertainties attached to some activities and some flexibility during implementation is desirable. Progress in project implementation, for example, may be dependent on the adoption rate of technology by both existing and new small-scale farmers. In such cases it will be possible for the team to provide only approximations of progress and the resources required over time.
Even with public sector projects which involve the design of production components and some support components (facilities and/or structures), the level of detail is often dependent on the project sponsor. Donor organizations, for example, usually require only “preliminary designs” (diagrams or sketches of lay-outs), to be prepared together with general lists of equipment/machinery, grouped in main categories.
In private sector projects, however, this Step is almost entirely concerned with “final design” of production components and possibly some support components, and estimation of the costs with a high degree of accuracy. Therefore it is necessary in order to prepare final design drawings and bills of quantities. These may not, in fact, be prepared by the formulation team, if it has no professional architects and engineers and the project sponsor may contract this task to a professional company.
Whatever the project and its components, the level of detail of design required should be specified in the TOR (Step 8d).
Step 9a - Design of production components
Production requires facilities and/or structures. Therefore, the design of production components must involve the input of professional designers to make certain the components function properly, meet all standards for construction and are safe to operate.
The design of production components is usually required in three types of projects. In brief, these are as follows:
almost all private sector projects (Model A):
public sector projects which include a publicly owned facility, such as a state hatchery, demonstration farm, production farm, or a research and development centre (Model B):
public sector projects which will require investment by private farmers in facilities (Model C).
In projects described in (a) and (b), above where facilities are to be provided, the quantification and preliminary analysis would have been completed in Step 6. The basis for the work of the architects and engineers in this Step, therefore, are the prefeasibility study report and the bio-programming document (if it was a separate report), which were produced in Steps 6b and 6c.
The work may divided into two parts, namely:
preliminary design, and
final design.
This is because the design and costs can be narrowed down further depending on the answer to some structural alternatives. For example, whether the hatchery should be built of brick or wood; whether the raceways should be constructed above ground or below; whether the research and training centre should have classrooms and laboratories in one building or two, etc.
In preliminary design major emphasis is upon the civil, mechanical, and architectural design of each facility. The design of all mechanical processes (such as the water systems) will be completed at this time to ensure that they are integrated into the structures correctly. Architectural concepts are developed, and structural systems identified. From information collected during bioprogramming, criteria are developed by the engineers for such factors as soil compaction for berms and dikes, and water treatment. A sufficient number of preliminary design drawings are completed to communicate the design concepts, and enable the costs to be recalculated.
In final design the “blueprints”, or detailed architectural and engi- eering drawings are produced for all physical components, and may be accompanied by a final design report. This enables the costs to be recalculated yet again with greater accuracy and approximate actual construction costs. Virtually all design problems will have been solved before final design, and changes during this stage usually cause cost over-runs.
In projects described by (c) above, namely public sector projects which require private investment, this task usually involves only preliminary design. This enables common standards to be set for all facilities or structures to be built through private investment if credit is to supplied by the project. For example, in a public sector project to increase the production of freshwater prawns, the project might involve a central government hatchery, which is carried through final design, but only preliminary design and specifications for grow-out ponds, such as designs for 0.5 and 1 ha ponds with standard water inlets and outlets, and berms of minimum width with standard compaction and slope.
Finally, in the private sector final designs and specifications are in such a form that preliminary bids can be solicited from contractors and suppliers to support project cost estimates. In the public sector designs and specifications remain generally less detailed, and cost estimates are made by reference to price lists and enquiries.
Step 9b - Design of production support components
Excluding support components which involve facilities and/or structures, the design of which has been described above, the majority of production support components relate to services such as extension services, training course, study tours, credit, veterinary advice, etc. These are usually less common to private sector projects than to large multi-components projects in the public sector, particularly those supported by international assistance. Most donor agencies have specific guidelines and policy booklets to assist the formulation teams in this Step.
The formulation team should keep in mind a number of key points when dealing with production support components. Firstly, the design of many support components must be made in close relationship with that of the corresponding production component; for example, any proposals for institution building should be made in relation to the projected size of the sub-sector. In some cases production support components may account for a major part of the project cost, and it is important to find the proper balance between minimizing their costs and ensuring that they fully meet the needs of the project. With regard to extension services, training, and technical assistance, for example, it is important (but difficult) to estimate the level of input of each component which will be required to produce or increase a unit of output in the respective production component.
Step 9c - Design of social support components
Many regionally-based rural agriculture development projects are frequently used as vehicles for expanding the scope and upgrading the quality of social services provided to rural communities as there may a direct link between social support and production components. For example, some irrigation projects may include the addition of a system to provide clean drinking water to village communities, or an extension centre may also be used a a centre for information on hygiene and public health.
There has been little opportunity to date to demonstrate where and how aquaculture projects in the public sector might include social support components, other than sharing facilities or possibly supplying potable water to a small community.
So far, therefore, there has been little risk of projects becoming difficult to manage and over-complicated through their inclusion. Project planners, however, should be aware of this issue and take care that, when opportunities occur, there is a reasonable balance between satisfying the basic needs of the target agents and meeting the objectives of the project.
Step 9d - Phasing of components and scheduling of activities within components
Toward the end of Step 9 it is necessary in public sector projects to bring together the completed and semi-completed designs of the various components to consider their phasing and scheduling. Phasing and scheduling may also be considered for some large projects in the private sector, in order to plan for financial returns on investment without expending all the capital or waiting for the complete facility to be built.
For relatively simple public sector projects with one or two components, phasing should not present any particular problem. However, in the case of large multi-component projects, decisions on phasing can be critical.
A logical sequence of activity in a complex project might be as follows:
A start-up phase of detailed field investigation, pilot-scale testing of new infrastructure, equipment and technological changes, and organization of participants. This may last from six months to two years.
A first operational phase, with introduction of key technology support packages, adequate production support components and institutional strengthening, with minimum supporting infrastructure. This may last from one to three years.
A second operational phase, with complementary technology support packages (building on the first or diversifying), and further investment in infrastructure. This may also last from one to three years.
A completion phase, with emphasis on community and social services.
In most cases, project implementation will lag behind the schedule set out in the project formulation documents. The frequency with which this occurs suggests that the fault invariably lies more with an unrealistic plan than with inefficient implementation. For example, in many countries the public authorities have elaborate procurement procedures which project management must observe. Conversely, the team has to guard against drawing up an implementation schedule which takes full cognisance of the procedures of the implementation agency but where no account is taken of those of the financing agency. The scheduling of specialized personnel inputs for various activities requires particular appreciation of the logistics of recruiting, placing, and supporting this type of manpower; slow recruitment is a very frequent cause for delay. Moreover, there are unavoidable seasonal constraints which have to be observed in both administrative procedures (such as fiscal years and annual budgetary commitments) as well as in the practicalities of working (such as the difficulty of construction in the rainy season). It is not difficult, therefore, for a few weeks of delay in implementation to be incurred which can often end in the loss of almost a full year if, for example, the start of a breeding season is missed.
It is essential, therefore, that the team avoids excessive optimism about the time required to start up a project and implement it. The various forms of network analysis, for example, PERT (Programme Evaluation and Review Technique), are of value in these situations. Formulation teams often do not possess the skills to carry out PERT, while many aquaculture projects will be relatively small and will not require such a sophisticated technique. They do require, however, a more systematic approach to the problem than merely an intuitive process, which is frequently what takes place.
The team should, first, take into account the performance of the implementing agency with other projects, where possible discussing this with the donor agencies concerned to identify where delays might be incurred; second, it must analyse the activities required to implement the components, and to sequence them in a bar chart. Most projects contain a number of activities, such as building a hatchery, training extension workers, setting up a credit scheme, etc. When activity schedules have been completed for each one they should be integrated into a bar chart for the project as a whole. An important part of this process is to identify and build into the bar charts the prerequisites of any particular activity, for example, land purchase for the hatchery.
Differences in Public/Private Sector Procedures (Step 9)
The four tasks of Step 9 concern private sector and public sector projects to different degrees. The design of production components (9a) is common to projects described in Models A, B, and C. If the components involve facilities and structures the design requires completion of professionally prepared preliminary design documents, and in most cases final design blueprints. Similarly if Models A, B, and C include support components (9b) which involve facilities and structures then the same also applies. Public sector projects (Models B, C and D) are more likely to have several other support components, such as extension and training. Social components (9c) are almost entirely applicable to public sector projects (Models B and C), but are not readily identified for aquaculture. Private and public sector projects described by all four Models require phasing and scheduling of activities (9d).
Organization and management are related aspects of administration. Organization is essentially about structure; management is essentially about operations.
The organization and management of a project should be designed with the long-term objective of successful institution building, so that the project will continue to operate satisfactorily once all temporary supports (such as technical assistance and external funding in public sector projects, and fiscal assistance and parent company support in the private sector) are withdrawn. In other words, good organization and management help to ensure that the project is self-sustainable.
Organization is concerned with:
Allocation of responsibility for specific tasks among the various participating bodies.
Establishment of hierarchical structures for decision-making (including definition of individual limits of authority).
Arrangements for the proper exchange of information on project activities.
Management is concerned with the planning, implementation, and control of all activities which come within the defined jurisdiction of each body participating in the project organization.
As organization and management are often both politically and technically sensitive the team should adopt the following general approach to its task:
Familiarize itself with existing organization and management aspects of development administration in the area/sub-sector concerned.
Draw up its proposals for project organization, management, and evaluation in provisional form.
Discuss these provisional recommendations with the principal agents who will be affected to reach a consensus wherever possible. This does not necessarily mean that the team should adopt all comments, but that all key agents are given the opportunity to express their points of view.
There are major differences in the organization and management of projects between the public and private sectors. In public sector projects the organization and management has to conform and fit in with existing organs of public administration. In the private sector project sponsors can make whatever arrangements they consider to be most effective, having regard to the size and complexity of the project, and their own financial and technical capabilities. The forms of organization available to the private sector were briefly described in Part I, Chapter 2.
The description of the team's work in Step 10, therefore, is confined to public sector projects.
Step 10a - Organizational structure for project implementation
The work of the team in this task is to decide which entity or entities should be responsible for project implementation and operation, and how they are expected to perform these functions.
General organization. For sub-sector based projects the team will usually find that the organization most logically suited to implement and manage the project is already concerned with development in the sub-sector, such as an agricultural development bank or the Fisheries Department.
For area-based projects, unless there is a regional agency which will assume sole responsibility for project implementation, the choice of an organization for project implementation may be more difficult. This is especially so where large projects have to be implemented and more than one existing government institution and perhaps parastatal bodies try to play a role, or where their participation is essential. For example, institutions interested in a typical aquaculture project may include the Department of Land and Water, the Department of Fisheries, Ministry of Agriculture, and the Agricultural Development Bank. In this situation, the team will have to find a way to coordinate (and resolve any differences) of these leading institutions at the higher policy making level, where major issues, such as land and water allocation, have to be resolved. It may be appropriate to organize this coordination through a committee of ministerial/departmental representatives with delegated authority to resolve policy issues, but which meet infrequently.
This situation has to be distinguished from the coordination required at the day-to-day level among the key agents, such as farmers, cooperatives, local government, district officer of the central government, and all others who are involved in the project (see Step 4b). Here, the team may find that the best organization is also a committee which operates at the district level (or its equivalent), but which meets very frequently.
However, when approaching the issue of organization through committees, the team should ensure that there are clear lines of responsibility, and leadership and management of the project is not diffused. This means that the team has to address itself to the issue of possible competing and conflicting aims when drawing up the TOR for these committees, and obtaining the agreement of the relevant institutions and key agents.
It is partly because of organization and coordination problems perceived within existing bureaucracies that formulation teams sometimes advocate an alternative form of organization, namely a parastatal body or project authority financed and managed independently. This approach parallels that of the private sector when the parent company sets up a new company or subsidiary for the project. However, for aquaculture projects, which are usually quite manageable even when large, this approach is not recommended except when the existing structures are totally inadequate. Building a new organizational structure is often extremely difficult and time consuming itself, and there is always a potential risk of conflict with existing structures if there are differing arrangements, such as staff benefits and preferential procedures.
Organization of project beneficiaries. The issue of securing beneficiary participation in the design of those projects which reach a large number of beneficiaries (in other words, a high adoption rate by farmers) has been referred to above (Step 4b). There were two purposes for the participation of farmers at that time in the planning of the project: (a) to determine their views and priorities, and the feasibility of different project options; and (b) to find means of securing their genuine involvement in project implementation and after. The success of a project where the adoption rate is critical will be dependent, to a greater or lesser extent, upon the organization which the team sets up, based on its discussions with farmers in Step 4b, to encourage farmers to become involved. In agriculture, these typically are users' associations (for equitably sharing resources, such as water), marketing associations, and simply associations of farmers. These associations have valuable functions, namely, to provide focal points for the project and thereafter a channel for communication between the responsible government department and farmers, and to enhance the ability of farmers to solve their own problems by using their own resources.
However, when fish and shellfish farming are new activities, the creation of these associations is not possible until there is a large number of commercial farmers. By this time the project will often be over. In these cases the organization of the fish farmers might be made through existing associations in the agriculture sector. When considering this role of existing associations, the team should determine their ability to solve their own problems with their own resources, and to identify further support they may require to service the fish farmers effectively. Then the team will be able to adjust their proposals or evaluate their needs properly to integrate with any new organization.
Where an aquaculture activity is a component of a rural development project in which the target group is made up of the more economically deprived and socially weakest members of the community, it will not be possible for the project to take advantage of existing associations. An important part of the project in this situation, therefore, is to identify a focus or issue upon which an association can be built, such as the equitable sharing of water or the marketing of the farmed products. However, as pointed out in the introduction to Part II, there are few such projects at the present time.
Where fish or shellfish farming is established, and there is already an existing number of farmers but without any association, the focus of any new association will perhaps be the resolution of common problems, or a specific purpose such as marketing. In this case establishing such associations is likely to be easier.
Ideally, farmers' associations should be financially self-sufficient (through members' subscriptions or levies on transactions), but in many cases this situation may take some time to bring about.
Relevance of project financing arrangements to organization proposals. This task only applies to larger aquaculture projects where certain activities require financing prior to them becoming financially self-sustaining, or where the government accepts the burden of financing after completion of the project. For example, where projects are dependent on the installation of central pumping systems and distribution canals, the pumping costs will usually be carried within the project budget until they are assumed by another entity on project completion. Another example might be a project hatchery, constructed and operated with project funds to provide seed as part of the support to potential farmers, which is to be sold to the private sector at the end of the project. In such cases the team should be clear about the flow of project funds through the administrative system of the project.
One important point for the team to bear in mind is that individual officers and committees, who exercise a financial control function and thus have responsibility for authorizing expenditures for the type of activities noted above, or for activities at other levels, often in practice take upon themselves a decision-making rôle about technical matters, regardless of their intended function and technical competence in those areas where decisions are required.
Step 10b - Proposals for project management, including training and technical assistance
Relationships between management skills and project objectives. Poor standards of management are the largest single source of institution problems faced by projects in the agriculture sector. There is no reason to believe that aquaculture projects are significantly different in this respect.
In many instances there is little connection between the care taken in the project design phase to ensure that the management arrangements are appropriate to the project, and managerial performance when the project is being implemented. In many such cases, the effectiveness of management may be reduced by bureaucratic delays in the release of resources, by institutionalized corruption, or by nepotism and political interference in the selection of staff.
On many occasions, however, teams could have taken greater care in project design to ensure that, when job descriptions were drafted, together with the qualifications and experience required of key staff, the tasks required of management were realistic in terms of the skills and experience known to be available to the project.
The importance of this Step is underlined when it is recalled that one of the principal tasks of the project planner is to ensure that there is a “fit” between the project tasks, the skills and experience available, and the timeframe within which the tasks have to be accomplished. Therefore, the team has to make a realistic and objective assessment of both the existing level of skills and the potentials for transfer of management and technical skills, and special knowledge which will be acquired under any training or technical assistance provisions (see below) in the project. If, after making this judgement, there is doubt about the “goodness of the fit” then one of the variables must be changed. If the level of available skills to the project have been assessed and found wanting, attention then has to be switched to the project timescale or the project objectives. In most instances the timescale is fixed. The logic of the situation would indicate that the objectives must be revised so that the tasks to be performed fall within the capabilities of the project management.
The issue of management and other skills, therefore, has to be approached early in the preparation stage when the first approximation is made of the project tasks and components. Unfortunately, the techniques for assessing skills are time consuming and are concerned with only one of the factors affecting institutional performance. It is most likely, therefore, that in practice the team will have to make its judgement on the basis of assessment of institutional capability, giving as much attention as possible to performance in decision-making and administrative procedures.
Project management arrangements.
One of the first tasks of the formulation team in this Step is to draw up TOR and job descriptions for the project management staff which the team believes is required (bearing in mind the points noted above), and to specify the qualifications and experience required of key staff. This includes both national counterpart staff and any international experts. It should be noted here that the TOR of any national counterparts should not be identical to those of international experts, although this is too often the case.
The team also sets up the structure to indicate relationships between different management responsibilities, and the lines of authority. A typical example of an organizational chart is illustrated in Figure 8.
This is followed by consideration of the organization and physical location of the project management staff within the institutional structure.
In the case of small projects in the public sector the management staff is usually physically located and remains in the principal organization structure concerned, such as the Department of Fisheries, or the Agricultural Development Bank, but without the creation of any specific project management unit (PMU). In larger projects it is usual for have a PMU, particularly if external financing is included. This is usually a temporary arrangement and it is disbanded once management of project activities is absorbed into the regular programmes of the agencies concerned. The PMU is typically attached to and physically located within the appropriate line Ministry or, in the case of area projects, may be placed within an area development authority or other regional institution.
Training. Institution building and development to a large extent means training people. The formulation team may conclude that managerial and technical skills of the staff of an implementing agency requires upgrading, and the project beneficiaries also need technical training to use properly the services and technologies which the project is making available. It may also be necessary to include training of peripheral participants, such as loan officers responsible for disbursing the credit. The formulation team may therefore draw up a training programme involving recruitment of consultants, who may be attached to the PMU or to various organizations within the project structure, for periods of training implementation. Alternatively, the participants may be sent on existing training courses elsewhere, or on study tours.
Technical assistance. Technical assistance (TA) is a costly part of the overall project expenditure, especially if any consultants required are international experts. It is important therefore to ensure that consultants providing the TA are used to maximum effect. This requires close involvement of executing agencies in the recruitment of consultants and in the provision of counterpart staff of the right calibre.
It is important that the formulation team takes care not to provide excessive TA in an attempt to overcome weaknesses in local management and technical skills. When such TA is withdrawn with the conclusion of external financing, the sustainability of the project may be jeopardized. It is preferable that the project tasks and components are so designed at the outset that national counterparts are given proper opportunities to manage the project on their own, even for short periods, and to learn from their mistakes. The team should keep in mind that it may often be preferable to use consultants in management “back-up” roles, making short visits at regular intervals rather than to appoint them to residential positions on site, even though this may make project implementation proceed more slowly and perhaps less smoothly than desired. In this context the potentially useful role of supervisory missions, by the organization which has undertaken project formulation, should be taken into account.
Figure 8 Project management organogram for a project to enhance inland fisheries through hatchery construction, improved management and training
In the private sector, as noted in the introduction of Step 10, the project sponsor decides his own management structure and staffing needs. However, the project team can assist by preparing TOR and job descriptions for each post. In addition, when construction of large and complex facilities are part of the project, such as a hatchery, the project sponsor usually contracts the team or hires professional engineers to assist in the bid process and select the contractor (Step 11), and then provide construction supervision.
Step 10c - A system for project monitoring and evaluation
Monitoring and evaluation (M & E) are closely related activities as both try to assess attainment of project activities from information gathered. Each activity, however, refers to a different management function and time perspective.
Monitoring is primarily a tool to feed back information to project managers on what is actually happening on the ground with regard to the delivery of project inputs and their use to create outputs. It is carried out on a continuing basis so that prompt corrective action can be taken when necessary. Evaluation, on the other hand, is concerned with assessing, after the event, the level of success of the project (or part of the project), and whether this particular design of the project can achieve its longer development objectives.
Here, the tasks of the formulation team are to determine:
Where in the project organization structure the M & E function is to be located, the composition of staffing, and to whom the group is responsible.
The major items of information (key performance indicators such as inputs into the project, outputs, costs, revenues) to be collected by the M & E unit, how they should be presented, the type of reports to be produced by the unit and at what intervals, and for whom. At this point the team should also indicate the principal items of information to be collected in the baseline survey.
There may be a risk of bias if the M & E function is established within project management. For this reason governments and donor agencies often insist that it is institutionally located elsewhere, sometimes in a specialist unit. It is important, however, from the point of view of the team that monitoring is made to work effectively by ensuring that the information it collects (a) is of value to project management, (b) is passed to that management quickly, and (c) is used by it. Very often the most effective way to bring this about is to recognise monitoring as a project management function and place it within the project. Evaluation, on the other hand, will base much of its work on the monitoring information collected, and can be placed outside the project where it is and can be seen to be independent of the project.
Differences in Public/Private Sector Procedures (Step 10)The activities of the two main tasks described in Step 10 are all relevant to public sector projects (Models B, C and D), particularly so when they are large projects with many components. Also, some of these activities are pertinent to private sector projects. Private sector projects (Model A) sponsors usually have a clear view at the outset of how the proposed project will fit into the overall company structure. As noted above, however, this issue can present substantial problems to a formulation team working in the public sector (Models C and D). The organization of project beneficiaries will in almost all cases be a matter of concern only in public sector projects. In contrast, issues related to project management are likely to be a common area of concern in projects in both sectors, although again it is likely that more attention will be necessary in those of the public sector.
Individual team members working on the design of individual project components (Step 9) will have, at the same time, costed their proposals as this is an important factor in selecting preferred design options. Together with estimation of costs for the selected project organization and management structures (Step 10), the final task for the team in Phase III is to consolidate the separate budgets into one cost estimation for the project as a whole, phasing the costs as appropriate, and preparing a proposal for the financing of the project (although in some cases the formulation team may have been instructed not to consider the question of financing at this stage). Thus the three main activities in Step 11 are:
Completion of estimates of all individual components costs.
Consolidation of component costs and of organization and management costs into overall project costs.
Preparation of a financing plan to show how the project costs are to be met.
A number of rules are applicable with regard to what costs are considered and how they are calculated. They are described briefly here.
The cost of all project inputs, however small, have to be borne by someone. Inputs which are to be procured with cash are financial costs, and have to be taken into account in this Step. Inputs procured without cash, such as the use of family labour to dig a pond, etc., are non-financial costs. These are not directly the concern of the team in this Step. Nevertheless, it is important that the team identifies and quantifies them for two reasons. First, the work to be done by agents may be a significant factor affecting the adoption rate of fish farming; second, such costs have to be taken into account later (Step 13a) when the economic analysis of the project is undertaken (public sector projects).
Any resource flow or input used by project activities and which would not be used in such activities if the project did not exist, is a project cost. In this category would fall, for example, existing field staff and facilities which are used for the benefit of the project. The costs of such staff and facilities are not usually included in the project budget, being regarded instead as in-kind contributions by the agency providing them. By the same token, all new staff recruited and new equipment purchased which would not otherwise be recruited or purchased through another source, are regarded as project costs: this is because these expenditures are truly additional to other expenditures and will be incurred only because of the project exists.
In public sector projects the estimated cost of contingencies, usually expressed as a percentage of a base cost, is added to the total at the end. In these projects, therefore, it is important in calculating unit costs to be as accurate as possible, and not add some margin for error for each item, otherwise the contingency accumulates and becomes a significant factor in the overall project cost. In private sector projects, where costing is done at a more detailed level than is general in the public sector, it is more usual for contingency elements to be calculated in respect of each item.
The information generated in this Step is used firstly to construct the financing plan for the project (Step 11d), and subsequently in the financial and economic analyses (Steps 12 and 13, respectively). It is necessary, therefore, to develop project revenue information, complementary to the cost information to complete these analyses.
In public sector projects, the financial and economic analyses are carried out on an incremental basis, that is the project is valued by reference to the difference between the with- and without-project situations. The period when the team is assembling the with-project costs and revenues will be, in many cases, an appropriate time to assemble the corresponding without-project information for use in the subsequent financial and economic analyses (Steps 12 and 13). The information assembled will be for both the project as a whole and for the principal agents.
Step 11a - Completion of estimation of individual component costs
Project costs for the purpose of Step 11 consist of all additional cash expenditures on goods and services which are required during the life of the project. It is necessary to distinguish between:
Capital costs, mostly one-off expenses, incurred during the investment or development phase (such as land purchase, civil works, site development, machinery, equipment, breeding stocks, studies and engineering, and start-up technical assistance).
Recurrent costs, normally calculated on an annual basis, incurred during the operational phase (such as seed, fertilizers, insecticides, feeds, fuels, lubricants, wages, salaries, repair and maintenance, replacement and maintenance purchases, supplies, utilities, rents, taxes, and insurances). Equally important for calculating recurrent costs are bioprogramming estimates of stock of fish on hand in any one month. This affects the logistics of feedstuffs (delivery, storage, and consumption) and cash-flow (Step 12). Here the contribution of an experienced farmer is important so that the logistics accurately reflect a farm situation.
After identifying the cost items as falling into either the capital or recurrent costs categories, the team should estimate the unit costs of each item, i.e. the civil engineer would estimate the cost of earth moving (US$/cubic meter), the mechanical engineer the purchase prices of pumps, and daily running costs, the fish farming expert would find the cost of feed delivered to the farm, and so on. Table 3 shows investment costs (before calculating contingencies, see below) for an aquaculture project in China. The Table shows the calculation of base costs from quantities and unit costs.
The cost information developed in this Step is, as noted above, used in the financing plan and the financial and economic analysis of the project. While the economic analysis is concerned with the costs and benefits to the economy generated by the project as a whole, it will be necessary for the construction of the financing plan and for the financial analysis, to have cost information for each of the principal agents. Clearly, these will differ according to the type of project. In a public sector production project (Model B), for example, costs would be required at the farm level, for processors, for the credit institution, etc. In many projects, farmers and other agents will differ considerably. In this situation, the team has to identify typical categories, noting the number of agents in each. Farmers, for example, may be categorized according to size of holding and project zone; fish traders may be categorized according to size and area of operation, etc.
The incremental costs of project components can then be calculated by multiplying the planned number of units to be used over and above what would exist without the project.
The physical inputs of the project are usually calculated over the life of the project (many externally-assisted public sector projects are assumed to have a life of about 15 years, but the period may vary according to the type and size of project). Cost estimates are usually made on a year-by-year basis over the life of the project. Table 4 shows the investment and operating costs of a shrimp farming project in China.
In separate tables, cost should also be broken down into:
Materials which are imported into the country, with costs in foreign currencies.
Materials normally obtained from domestic sources, with costs in national currency.
Skilled personnel inputs with a component of foreign experts, and also foreign currencies.
Unskilled labour inputs.
Profits and trade margins.
| Quantity | Base Costs | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Unit | 1989 | 1990 | 1991 | 1992 | 1993 | Total | Unit Cost | 1989 | 1990 | 1991 | 1992 | 1993 | Total | |||
| 1. | INVESTMENT COSTS | |||||||||||||||
| A. | Sea Dyke a | |||||||||||||||
| Earthwork | 000 m3 | 100 | 68 | - | - | - | 168 | 2.68 | 267.0 | 181.6 | - | - | - | 448.6 | ||
| Sub-Total Sea Dyke a | 267.0 | 181.6 | - | - | - | 448.6 | ||||||||||
| B. | Inlet and Outlet Canals | |||||||||||||||
| Earthwork | 000 m3 | 543 | 543 | - | - | - | 1,086 | 2.68 | 1,449.9 | 1,449.9 | - | - | - | 2,899.7 | ||
| Main Sluice Gates | No | - | 2 | - | - | - | 2 | 15.01 | - | 30.0 | - | - | - | 30.0 | ||
| Sub-Total Inlet and Outlet Canals | 1,449.9 | 1,449.9 | - | - | - | 2,929.7 | ||||||||||
| C. | Bridges and Sluice Gates | |||||||||||||||
| Bridges | No | 4 | 5 | - | - | - | 9 | 110.51 | 442.0 | 552.5 | - | - | - | 994.5 | ||
| Sluice Gates | No | 400 | 404 | - | - | - | 804 | 4.86 | 1,940.0 | 1,959.4 | - | - | - | 3,899.4 | ||
| Culverts | No | - | 1 | - | - | - | 1 | 361.15 | - | 361.2 | - | - | - | 361.2 | ||
| Sub-Total Bridges and Sluice Gates | 2,382.0 | 2,873.1 | - | - | - | 5,255.1 | ||||||||||
| D. | Pumping Station (60 m3/sec) | |||||||||||||||
| Earthwork | 000 m3 | 18 | 18 | - | - | - | 36 | 2.68 | 48.1 | 48.1 | - | - | - | 96.2 | ||
| Stonework | m | 1,000 | 1,500 | - | - | - | 2,500 | 0.13 | 125.0 | 187.5 | - | - | - | 312.5 | ||
| Concrete | m3 | 230 | 230 | - | - | - | 460 | 0.16 | 34.5 | 34.5 | - | - | - | 69.0 | ||
| Reinforced Concrete | m3 | 2,480 | 2,480 | - | - | - | 4,960 | 0.46 | 1,116.0 | 1,116.0 | - | - | - | 2,232.0 | ||
| Axial Flow Pumps | No | 4 | 4 | 4 | - | - | 12 | 100.01 | 400.0 | 400.0 | 400.0 | - | - | 1,200.0 | ||
| Transformers | No | 2 | 2 | - | - | - | 4 | 50.01 | 100.0 | 100.0 | - | - | - | 200.0 | ||
| High Voltage Panels | No | 11 | 11 | - | - | - | 22 | 13.61 | 149.6 | 149.6 | - | - | - | 299.2 | ||
| Low Voltage Panels | No | 10 | 10 | - | - | - | 20 | 5.01 | 50.0 | 50.0 | - | - | - | 100.0 | ||
| Miscellaneous Equipment | LS | - | - | - | - | - | - | 300.0 | 350.0 | 150.0 | - | - | 800.0 | |||
| Installation | LS | - | - | - | - | - | - | 100.0 | 200.0 | 100.0 | - | - | 400.0 | |||
| Sub-Total Pumping Station (60 m3/sec) | 2,423.2 | 2,635.7 | 650.0 | - | - | 5,708.9 | ||||||||||
| E. | Feeder Roads b | KM | - | 10 | 10 | - | - | 20 | 50.01 | - | 500.0 | 500.0 | - | - | 1,000.0 | |
| F. | Prawn Pool | |||||||||||||||
| Earthwork | 000 M3 | 3,000 | 4,000 | 3,000 | - | - | 10,000 | 2.68 | 8,010.0 | 10,680.0 | 8,010.0 | - | - | 26,700.0 | ||
| Sluice Gate Controls (2 ton) | No | 150 | 200 | 50 | - | - | 400 | 0.51 | 75.0 | 100.0 | 25.0 | - | - | 200.0 | ||
| Sluice Gate Control (30 ton) | No | 150 | 200 | 50 | - | - | 400 | 0.61 | 90.0 | 120.0 | 30.0 | - | - | 240.0 | ||
| Sluice Gate Control (50 ton) | No | 5 | 6 | 5 | - | - | 16 | 1.01 | 5.0 | 6.0 | 5.0 | - | - | 16.0 | ||
| Sluice Gate Control (100 ton) | No | 2 | 3 | - | - | - | 5 | 1.61 | 3.2 | 4.8 | - | - | - | 8.0 | ||
| Sampans | No | 100 | 200 | 100 | - | - | 400 | 5.01 | 500.0 | 1,000.0 | 500.0 | - | - | 2,000.0 | ||
| Miscellaneous Equipment | LS | - | - | - | - | - | - | 1,250.0 | 1,250.0 | 1,250.0 | - | - | 3,750.0 | |||
| Installation | LS | - | - | - | - | - | - | 650.0 | 670.0 | 680.0 | - | - | 2,000.0 | |||
| Sub-Total Prawn Pool | 10,583.2 | 13,830.8 | 10,500.0 | - | - | 34,914.0 | ||||||||||
| G. | Power Plant | |||||||||||||||
| Transformer Room | M2 | - | 165 | - | - | - | 165 | 0.6 | - | 98.2 | - | - | - | 98.2 | ||
| Boiler and Storage | M2 | - | 98 | - | - | - | 98 | 0.6 | - | 58.4 | - | - | - | 58.4 | ||
| Office and Dormitory | M2 | - | 72 | - | - | - | 72 | 0.6 | - | 42.9 | - | - | - | 42.9 | ||
| Equipment | - | - | - | - | - | - | 30.0 | 100.0 | 100.0 | - | - | 230.0 | ||||
| Electric Poles | - | - | - | - | - | - | 15.0 | 16.0 | - | - | - | 31.0 | ||||
| Power Cables | - | - | - | - | - | - | 172.0 | 200.0 | 200.0 | - | - | 572.0 | ||||
| Installation | - | - | - | - | - | - | 170.0 | 200.0 | 200.0 | - | - | 570.0 | ||||
| Miscellaneous Equipment | - | - | - | - | - | - | 18.6 | 18.6 | 18.6 | - | - | 55.8 | ||||
| Sub-Total Power Plant | 405.6 | 734.0 | 518.6 | - | - | 1,658.2 | ||||||||||
| Total INVESTMENT COSTS | 17,510.8 | 22,234.8 | 12,168.6 | - | - | 51,914.1 | ||||||||||
| Total | 17,510.8 | 22,234.8 | 12,168.6 | - | - | 51,914.1 | ||||||||||
a Earthdyke 11 km Long
b 20 km
| Years | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8–19 | 20 |
|---|---|---|---|---|---|---|---|---|---|
| Production Area (ha)a | - | 667 | 1 333 | 2 000 | 2 000 | 2 000 | 2 000 | 2 000 | 2 000 |
| Costs | |||||||||
| Investment costs | 24.50 | 39.50 | 27.20 | ||||||
| Operating costs | |||||||||
| Seedlingb | - | 1.00 | 2.00 | 3.00 | 3.00 | 3.00 | 3.00 | 3.00 | 3.00 |
| Feed - processedc | - | 2.75 | 5.50 | 8.25 | 8.25 | 8.25 | 8.25 | 8.25 | 8.25 |
| - freshd | - | 1.08 | 2.16 | 3.24 | 3.24 | 3.24 | 3.24 | 3.24 | 3.24 |
| Fertilizere | - | 0.02 | 0.03 | 0.05 | 0.05 | 0.05 | 0.05 | 0.05 | 0.05 |
| Energy - electricityf | - | 1.29 | 2.58 | 3.87 | 3.87 | 3.87 | 3.87 | 3.87 | 3.87 |
| - oilg | - | 0.02 | 0.05 | 0.07 | 0.07 | 0.07 | 0.07 | 0.07 | 0.07 |
| Labour | - | 0.89 | 1.78 | 2.66 | 2.66 | 2.66 | 2.66 | 2.66 | 2.66 |
| Other costsh | - | 0.70 | 1.40 | 2.11 | 2.11 | 2.11 | 2.11 | 2.11 | 2.11 |
| Working capitali | 3.00 | 3.00 | 3.00 | - | - | - | - | - | (9.00) |
| Sub-total | 3.00 | 10.75 | 18.50 | 23.25 | 23.25 | 23.25 | 23.25 | 23.25 | 14.25 |
| Overhead costsj | - | 1.00 | 1.60 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 | 2.00 |
| Total costs | 27.50 | 51.25 | 47.30 | 25.25 | 25.25 | 25.25 | 25.25 | 25.25 | 16.25 |
a Construction of 200 ponds (each of 3.33 ha) in each of years 1–3
b 300 000 seedlings/ha, at ¥ RMB 5/1 000
c 3.75 t/ha at ¥ RMB 1 100/t
d 13.5 t/ha at ¥ RMB 120/t
e 30 kg/ha at ¥ RMB 800/t
f Total of 24 234 kw at ¥ RMB 160/kw
g Total of 90 t at ¥ RMB 800/t
h Maintenance, labour protection, compensation, etc.
i Represents short-term working capital to meet costs prior to harvest. Estimated on the basisof costs being spread over a 6-month operating period (May-October)
j Includes management charge paid to Breeding Company (2% of sales), insurance, other officeoverhead costs, etc.
- Taxes and duties (noting that imported equipment exempt from customs duties may not necessarily be tax free).
These cost breakdowns will facilitate the analysis (Step 13) when economic costs and benefits are calculated.
As already noted, the usual practice in the private sector is for the team to calculate the contingency elements in respect of each item. The team must remember that the safety margins which each cost estimator adds to his respective component can magnify the total cost. This is particularly important for capital costs of construction projects, such as hatcheries and farms. When production components are bioprogrammed from little factual data, biologists and technologists frequently add generous margins for error. This information is then transposed to engineering drawings, which are then costed with further margins for mechanical inefficiencies, safety, and back-up systems. For example, the biologist may have research information about the lethal and tolerable levels of oxygen for the species in question, but knowing the fluctuations due to the build up of ammonia, photoperiod changes, temperature changes, and altitude, etc., he specifies a required design level well within these levels. The design engineer translates the total oxygen requirement into water delivery. However, a mechanical delivery system of pumps and pipework has its own inefficiencies and resistances, and the engineer calculates these into his design, also adding a small margin of safety for extreme conditions. Thus, the final design of the hatchery or farm may have pumps and pipework considerably over-engineered for the task. Increases in costs for water delivery are exponential rather than linear, and consequently construction costs are greatly increased, as are subsequent operating costs of the pumps. These increases are further magnified in the contingency costs, which are a percentage of base costs. As a result, total costs may well be inflated.
It is important, therefore, that it is agreed, within a team working on private sector project formulation, where the safety margins are to be applied and by whom; team members who may have little experience in costing (for example, perhaps the aquaculture technical staff and biologists) should be aware of their limitations in this area.
Step 11b - Consolidation of component costs and organization and management costs into overall project costs
This activity is typically the responsibility of the financial analyst or economist in the formulation team, or possibly the team leader. The task involves the aggregation of the cost estimates for each component (production, support, social, and organization and management) into a consolidated table of costs for the project as a whole. Usually, except for small and simple projects, separate tables are prepared for capital and recurrent costs. All the projects costs have to be phased on an annual basis over the life of the project. This is largely a mechanical task. Care should be taken at this point to ensure that capital replacement costs are entered into the table at the appropriate points.
As noted above (Step 11a), the treatment of contingency costs differs according to whether the project is in the public or private sector. In the private sector contingencies are estimated on an item-by-item basis and, as a result, total project costs are not inflated. In the public sector, contingencies are added after all the other project costs have been aggregated and phased on an annual basis. Unless care is taken, this method will inflate total costs.
All project component costs (from Step 9) and project arrangement costs (Step 10) are aggregated and phased on an annual basis (phasing of overall project costs). When this is complete, a physical contingency, preferably not exceeding 5% of the base costs but never more than 10%, is added. Clearly, however, the degree of uncertainty associated with cost estimates depends to a large extent on the nature of project activities. For example, in a project to construct, equip, and operate a national aquaculture centre, with components of production, research, and training, all the elements are readily identified and can be costed with a high level of accuracy. In a project to improve inland fish production through small-scale farming, the potential number of participants cannot be estimated with any accuracy, and therefore the physical contingency has to be relatively large.
The team should estimate the costs of project components on the basis of present-day prices. The task of estimating how much additional finance will be required to meet price escalation in the cost of project components will be primarily the responsibility of the financial analyst or economist. It is likely, however, that the rate of cost inflation of different items will vary, and the economist/financial analyst should seek the advice of the appropriate technical specialists about price trends for the inputs with which they are most concerned. The inflation of the physical contingency costs, as well as the base costs, should not be overlooked.
Step 11c - Estimation of project revenues
This activity is confined to production projects, whether they be in the public or private sectors. It is usually undertaken by the economist but, in those teams where there is a marketing expert, he may undertake, or collaborate in the task.
To a large extent this task is a mirror image of Step 11a. First, the team has to make an estimate of revenues accruing to the relevant agents (for example, farmers, processors, credit institutions, etc.), grouped in the same categories as adopted in Step 11a, without the project. The information generated in Step 5b (“Projecting supply, demand and price changes”) will be relevant to this part of the activity, but not until the project zones had been demarcated and specific agents selected will it have been possible to have undertaken this task with any accuracy. Second, revenues of the same agents, or categories of agents, with the project, are estimated.
In public sector projects where there are foreign currency earnings attributable to the project, the project revenues should be broken down into domestic and foreign currency earnings, with and without the project.
Step 11d - Preparation of a provisional financing plan
The annual financing requirement of the project is the amount by which the project costs (cash outflows) exceed project returns (cash inflows) each year. In investment projects the initial years normally show major cash deficits. The total financing requirement is therefore the sum of the annual cash deficits throughout the life of the project.
A project is financed from one or several of the following sources:
Government budget allocations and/or loans.
International aid and/or public loans.
International and/or domestic commercial loans.
Equity investment.
Proceeds from the sale of project outputs.
The usual practice of external assistance agencies is to contribute mainly to expenditures during the investment period, and not to expenditures during the operational phase, thus limiting their potential funding commitment in level and time. A further restriction on the type of lending by some agencies is a reluctance to finance capital expenditures in domestic currency, preferring to finance only foreign currency expenditures. It follows that the team should be aware of the policies and procedures of the financing agencies concerned, and to keep proposed contributions within such constraints.
Experience indicates that it is important not to assume that the government, particularly of a developing country, will be able to meet the balance of the project costs not financed by external agencies. For a production-oriented project, the formulation team has to establish the official policy on project cost recovery of both the project sponsor and the government, and to what extent they require the project to be self-financing. This may result in two questions which have to be answered by the team in relation to the specific design of the project:
How much of the surplus, which accrues to project beneficiaries as a result of their participation in the scheme, can reasonably be taxed?
Assuming that in principle there is scope for cost recovery, can a practical and effective method of tax collection be devised.
For production-oriented and other projects, which are to be partially funded through external assistance and where a government contribution is required for project implementation and its subsequent operation, the team has to make a judgement of whether, given the priority attached by the government to the project, the government's share of the costs will be forthcoming. When the team has any reservations about the matter, they should be raised as an outstanding issue in the project report, to be resolved directly between the government and the funding agency.
Table 5 shows an example of the sources and application of funds in a project. It gives the breakdown of project cost recovery between the project revenues and external assistance loan, and the net financing requirement for which a government contribution would be required.
Apart from directly financing part of the project costs through taxes, levies, and service charges, the beneficiaries may also finance investment costs indirectly through borrowing and repayment of long-term loans. These can also be included in the financial organization of the project. Careful analysis is required here to show, with a reasonable degree of accuracy, the income position of the beneficiaries. This is necessary to ensure that it is likely to be feasible to finance the required part of the project in this way, i.e. (a) that beneficiaries' net incomes will be sufficiently high to enable the repayments to be made and, (b) borrowing is attractive from the beneficiaries' viewpoint.
| 1 | 2 | 3 | 4 | 5–7 | 8 | 9–10 | 11 | 12 | 13–19 | 20 | |
|---|---|---|---|---|---|---|---|---|---|---|---|
| REVENUES | |||||||||||
| technical service fee | 205 | 308 | 410 | 513 | 513 | 513 | 513 | 513 | 513 | 513 | 513 |
| marketing fee | 137 | 205 | 274 | 342 | 342 | 342 | 342 | 342 | 342 | 342 | 342 |
| taxes | 684 | 1026 | 1368 | 1710 | 1710 | 1710 | 1710 | 1710 | 1710 | 1710 | 1710 |
| contract fee | 6265 | 6265 | 6265 | 6265 | 6265 | 6265 | - | - | - | - | - |
| total revenues | 7291 | 7804 | 8317 | 8830 | 8830 | 8830 | 2565 | 2565 | 2565 | 2565 | 2565 |
| OPERATING COST | |||||||||||
| administration(1.5%) | 205 | 308 | 410 | 513 | 513 | 513 | 513 | 513 | 513 | 513 | 513 |
| taxes | 684 | 1026 | 1368 | 1710 | 1710 | 1710 | 1710 | 1710 | 1710 | 1710 | 1710 |
| subtotal operating cost | 889 | 1334 | 1778 | 2223 | 2223 | 2223 | 2223 | 2223 | 2223 | 2223 | 2223 |
| operating incomes | 6402 | 6470 | 6539 | 6607 | 6607 | 6607 | 342 | 342 | 342 | 342 | 342 |
| INVESTMENT COST | |||||||||||
| infrastructure | 28515 | - | - | - | - | - | - | - | - | - | - |
| vehicle | 447 | 486 | - | - | - | - | 447 | 486 | - | - | -49 |
| tools | 444 | - | - | - | - | - | - | - | - | - | - |
| technical assistance | 28 | 28 | - | - | - | - | - | - | - | - | - |
| overseas training | 10 | 77 | 77 | - | - | - | - | - | - | - | - |
| local training | 206 | 220 | 259 | 131 | - | - | - | - | - | - | - |
| research | 38 | 76 | 76 | 38 | - | - | - | - | - | - | - |
| subtotal investment cost | 29660 | 887 | 440 | 169 | - | - | - | 447 | 486 | - | -49 |
| net income before financing | -23258 | 5583 | 6099 | 6438 | 6607 | 6607 | 342 | -105 | -144 | 342 | 391 |
| FINANCING | |||||||||||
| loan received (70%) | 20755 | 621 | 308 | 118 | - | - | - | - | - | - | - |
| repayment(9.9%) | 4212 | 4338 | 4400 | 4425 | 4425 | 250 | - | - | - | - | - |
| net financing | 16543 | -3717 | -4092 | -4307 | -4425 | -250 | - | - | - | - | - |
In practice, the analysis of the financial position of the beneficiaries may fall within the next Step. However, it is wrong to think of project design, including the preparation of the financing plan and project analysis, being in separate compartments. Instead, they should be seen as complementary, the financial analysis showing where changes in the project design are needed.
Differences in Public/Private Sector Procedures (Step 11)The three tasks of this step are broadly applicable to all projects, with the exception that contingencies (11b) are treated differently in the public sector (Models B, C, and D). The detail in the costing process in the formulation of projects in the private sector (Model A) is such that sound judgements can be made about the physical contingencies required in respect of each item. In public sector projects costing is not carried out to such a detailed level.
