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5. Project formulation and feasibility
The third stage of project design is a project formulation and feasibility study, which will confirm whether the project is viable. Projections of demand and cost information derived during the second stage detailed design will form the basis of a financial and economic evaluation of the proposals. The overall process that needs to be followed at this stage is shown in Figure 11.
The function of the third stage will be to critically examine the various physical design options (outline and foal master plans) that might meet the objectives set for the project. Different institutional and management strategies should also be examined and their requirements in terms of staffing, equipment and infrastructure evaluated. This may lead to design modifications, requiring the work undertaken in the second stage to be reviewed and revised. It might not be possible to complete the last phases of the second stage (the final master plan, detailed site planning and infrastructure designs) until the third stage has also been completed.
Figure 11 Stage III Project formulation and Feasibility
On the basis of studies already undertaken in the previous stages the objectives of the project should have been clarified. An end-of-project-status will have been be defined and the purpose of Stage 111 will be to confirm that the project conditions and overall goals can be achieved.
It should be clear that the project can achieve benefits for the main target groups of beneficiaries and that functioning market information and management systems can be established (see Chapter 6). At the start of Stage 111 it is necessary, therefore, to draw together all the previous data and findings into a form which will allow this evaluation. This process is usually termed "project design". Aid agencies, such as UNDP, often have their own methodologies for undertaking this (see Bibliography).
Assembling information. To evaluate a project it is first necessary to review the project context and assessment of the project's global impact prepared during the first design stage (see Chapter 3) and then to systematically assemble the surveys, plans and programmes derived in the previous detailed design stage (see Chapter 4) so that the proposed physical changes to a market can be both quantified and costed.
Evaluation of options. In assembling the project design many alternatives may be available which might meet the projects objectives. These will have been examined to see whether they are still viable and if they will need to be tested in the financial and economic analysis. These options, which may all have different operational and cost implications, might include:
· alternative institutional strategies;
· different approaches to setting revenue levels;
· alternative packages for management, operations and staffing; and
· alternative physical requirements, which might include: options for the final master plan or circulation system; different standards of building construction; and varying off-site infrastructure requirements
In outlining the options, it is usual to select the most likely one to represent the "basic case", which can then be modified to represent the other alternatives. In the case of an existing market the basic case may be to do nothing, that is to neither improve the facilities at an existing location nor to relocate the market to a new site.
Financial analysis assumptions There are a number of techniques for evaluating projects and these are outlined in Chapter 10. The most usual of these techniques is to prepare a financial analysis, where the costs and revenues of a project are represented as a financial statement as cash flows. To do this, all the physical inputs required over a project's life will need to be phased and then costed on an annual basis, in present-day prices.
Typical inputs, which would be compiled in a tabulated form, may include: civil works (buildings and infrastructure); equipment; technical assistance and professional fees of design and supervision consultants; furniture and fittings; land purchase, and temporary rental of accomodation. Recurrent costs will include staff wages and salaries and other operating expenditure, such as interest payments, insurances, office overheads, utilities, repairs and maintenance, audit fees and depreciation. These costs are set against the anticipated revenues derived from renting space to wholesalers, parking fees, commission on auctions and other charges.
Accurate cost estimates of capital works, recurrent expenditure and anticipated revenues for a project are often not possible at this stage and, in preparing the cash flows, assumptions will need to be made. These are again described in Chapter 10.
Financial and economic analysis
The expected returns of a project should be initially analysed on the basis of the projected cash flow for the "basic case". This will produce a financial "internal rate of return" (IRR), represented as a percentage and a "net present value" of the project, represented as a monetary sum.
Project returns and methods of calculation. As markets are often fully or partially financed by central or local government funding (see Chapter 7) they have to compete with other projects for this financing. It is usual, therefore, to expect that a project will have a return at least equal to what might be expected from comparable investments. A typical range of values would be between 10 -20 percent. Net present values should always be positive and exceed the total capital outlay on the project.
Internal rates of return and net present values are discussed in Chapter 10. They can be calculated manually but it is more usual to use either the financial functions on a desk calculator or to enter the cash flows into a spreadsheet program on a personal computer. The latter is most convenient, as variations can be calculated most easily.
Sensitivity analysis. As well as estimating the returns from the "basic case" a project should be further tested by undertaking a sensitivity analysis. This technique allows alternative physical design options to be considered, as well as the effect of likely variations in revenues and in the share of total produce. that might pass through" a market. Typically, the sensitivity analysis might test a substantial reduction in overall revenues, either from lower rents or rates of commission (perhaps 3 percent rather than 5 percent) or a decrease in turnover or an increase in recurrent costs from, say, over-staffing of the market. Another technique for looking at a project in a critical manner is to compare it to the costs and returns of not undertaking it at all ("do-nothing" or "without project"). This is a useful method when trying to assess whether to either build a new market or whether to improve an existing market.
Economic analysis. A financial analysis looks at a project only from the point of view of the operating costs and revenues of the market's owner. It will ignore any indirect economic benefits of a project, such as transport cost savings and reductions in wastage and deterioration of produce. These effects can be reflected in an economic analysis, which will give an estimate of the project's benefits to the whole economy.
To calculate an economic analysis requires a number of adjustments to the financial cash flow. Depreciation should be omitted as well as land acquisition and taxes, as these are both transfer payments. Shadow pricing of labour, if had been included in the financial analysis, should be omitted. If management training and other forms of government or donor assistance is provided the estimated costs of these should be added to the cash flow.
Estimating the net economic benefits of marketing projects in developing countries is difficult as many of the benefits are unquantifiable. Some benefits are indirect, including improved supplies of better quality produce, greater market transparency and more competitive trader participation. The direct benefits of a market project include reduced handling costs, lower transport costs because of an easing in traffic congestion and reductions in produce losses.
The latter is often the most convenient method of estimating overall benefits. If, for example, the reported losses for vegetables are around 25 percent and the economic analysis assumes that losses can be limited to an overall 20 percent as the result of market improvements, then the benefits would be based on the value in monetary terms of a 5 percent saving in produce.
It is usual to expect that the economic returns of a marketing project will look better than the financial returns. As with the financial analysis, though, it is advisable to examine the returns critically by applying a sensitivity analysis.
Looking at the distribution of benefits it might also be apparent that those from part of a project (such as a cold store) are low compared with the benefits obtained from other sources. The economic viability of this part of a project should be looked at separately, strictly reviewing whether all the storage is necessary and if a proportion of the accommodation might, for example, be better provided in conventional naturally ventilated stores.
The justification for a project will be based on a description of its benefits, backed-up, as far as possible, with the quantified results from the financial and economic analysis. In discussing project justification in Chapter 3 the main method of analysis was to look at a project's global impact and the short-term risks which would affect its progress during the later design stages. The project justification should again examine these issues to ensure that the project will still benefit the target beneficiaries and that the short term risks have been eliminated.
At the formulation stage, however, it is also necessary to determine all the factors which, although they do not have to be resolved before project design can proceed, could cause major delays in the effective operation of a market. Physical improvements to a market cannot be looked at in isolation and if it doubtful whether the appropriate institutional and non-physical changes will be achieved then the whole project's viability is likely to be in jeopardy.
Immediate risks to achieving financial targets. These risks include the postponement in the appointment of the market manager and the full complement of market operations staff; delays in the setting of regulations for the level of fees and the administration of the market; shortage of working capital for operation, staff salaries and recurrent maintenance; and the lack of suitable training courses for market staff. It will be essential to resolve these matters before the market starts to operate.
Long-term risks. Even at this stage and despite rigorous analysis, long-term risks may still be present which might prevent achievement of a project's output, raising doubts about its overall viability or about the design parameters used in its preparation. The most likely of these risks is that the basic assumptions for achieving agricultural sector targets are not realistic. There may not, for example, be a guaranteed market for fresh fruits and vegetables and demand may not necessarily rise in line with increased production from horticultural projects. Realistic per caput consumption targets are needed to provide the basis for this assessment.
Another common mistake is to be too optimistic about a market's performance in terms of the percentage of the total potential wholesale trade that will pass through it. This is often justified on the basis that using the facilities of the improved or newly located market will be mandatory, but despite this it still remains only an assumption and one which has caused the failure of many projects. The reduction of these risks will depend on the adequacy of the surveys undertaken at the design and feasibility stages and the effective long-term monitoring of the project, starting at the implementation stage(see Chapter 6).
Environmental aspens. As well as its general benefits and its financial and economic performance, a project should also be assessed as to whether it might have any negative impact on the environment.
The negative environmental impact of a project normally relates to the development of the market site itself. If this not undertaken properly and in conformity with an agreed master plan the development could: increase traffic congestion in the vicinity of the market site, particularly if the site entry is poorly located;
· cause flooding to adjacent land, because of increased surface water run-off, a restricted site outlet or lack of on-site storage; and
· produce glare and noise impact on adjacent land uses if insulation, screening and planting proposals are not carefully integrated into the development programme. These issues are discussed in further detail in Chapter 13.
At the end of this design stage, assuming that a project has been found to be it is viable, the preferred design option should have been selected and the final shape of a project determined, including its management and institutional arrangements. In summary, the issues that should have been resolved include:
· project outputs- the expected results from a project;
· project activities- the tasks to be undertaken to achieve these outputs;
· project inputs- the components that must be included in a project to allow the activities to be undertaken:
- physical (civil works and equipment);
- manpower and technical assistance; and -further survey and study requirements;
· project budget- what it will cost to provide the inputs; and the
· project work plan - when the project activities are likely to take place.
Further issues to be resolved. The financial and economic analysis of a project and the types of project risks, outlined in the project justification above, will provide a basis for defining issues that may need to be addressed before progress can be made with project development. Before proceeding further there should be clear policies and action programmes available to eliminate or reduce risks to a low level, possibly requiring adjustments to the project design.
Check list of typical project issues. The types of institutional, financial and physical issues that may need to be considered at this stage are likely to be as follows:
· the purchase or transfer of land for new sites;
· Iease-back arrangements between government and private enterprise;
· the finalization of financial and institutional arrangements;
· the clarification of legal and tax issues;
· agreements with statutory authorities on solid waste collections, surface water drainage, sanitation, water supply and other environmental issues;
· agreement on boundary and environmental matters with adjoining owners;
· foalisation of facility requirements, planning criteria and a detailed design brief which will form the basis for the preparation of tender documents at the project implementation stage;
· finalization of training requirements and programmer; and
· agreement with the market's users on lease conditions, acceptable levels for rents, rates for commission on auction sales and other revenues.
