This manual provides a detailed description of the methodology and procedures involved in preparing, and then assessing, project profiles for locally developed rural investments, using a participatory approach. Such project profiles comprise the first step in defining and assessing rural investments that not only respond to the real priorities and needs of the applicants, but which are also well prepared, contain all relevant information, and are readily understandable by those who will be asked to finance the investment.
A prior RuralInvest Module (Module 1) provides guidance on the initial process of collectively identifying the opportunities and obstacles facing a rural community or group and, through this process, creating a local development plan that selects and prioritises areas in which specific investments are expected to contribute to economic and social growth. Originally Modules 1 and 2 were combined, but experience has shown that many communities or groups seeking social and economic development funds have already participated in community or group-level processes similar to those outlined in Module 1, and thus are able to pass directly to the development and assessment of specific rural investment profiles. Furthermore, RuralInvest is also increasingly being used by individuals or families who are seeking financing for personal investments, that, by their very nature, do not require the participatory identification and prioritisation process dealt with in the first module.
However, it should be stressed strongly that an investment can only be as good as the purpose to which it is applied, and even an apparently successful investment will be a poor use of resources if it does not resolve a key constraint, or address a key opportunity, facing a family, group or community. The participatory process of identifying and prioritising key needs and constraints embodied in Module 1 and other approaches, is thus of real value, and should not be 'skipped over' or ignored because of a desire to get something done rapidly, or simply because it seems too much work.
Many projects fail simply because - from the outset - the goal and purpose of the investment is never clearly defined, and this is particularly true where the project represents the interests of a group or entire community. A village dairy plant might be seen by the local farmers, for example, as a way to sell surplus milk, while the women of the village may see it primarily as a source of employment. Yet again, the village development committee might see it as a source of profits, which can be used to finance other activities in the community. These aims are not necessarily incompatible, but a community which is not clear from the outset as to the key issue to be tackled by the investment is likely to face severe problems later on: the farmers will complain that the high prices for dairy products set by the village development committee (to increase profits) is reducing demand for their milk, while the committee may blame instead the high costs caused by having too many staff on the payroll (to create employment in the village).
Except in the case of very small, or simple, investments, the project profiles produced in this module are not the end of the investment analysis. In fact, it is important to realise that, for investments of any size or complexity, the fact that the profile yields a positive result provides no guarantee that the eventual investment will be worth undertaking. This is because the profile is a simple 'back-of-the envelope' approach, designed to be easily understandable by rural villagers and farmers, and to provide a warning for those ideas that are clearly not realistic and need to be re-thought. However, the profile ignores, or leaves aside, many complications that need to be taken into account before a decision is made to commit tens of thousands of dollars to an idea.
It is for this reason that - in most cases at least - an attractive investment or project profile will be taken forward to the stage of detailed project preparation and analysis. This process is the theme of Module 3. In Module 3 such factors as changes in the project over time, the impact of financing costs, the need for working capital, and a greater definition of demand, management and environmental issues, are all given attention.
Many people are not clear as to what an investment project really is, and this often becomes apparent when moving from the needs identification and prioritisation stage of Module 1, to the project profile identification and assessment in this Module. As a result of such confusion, ideas will often be presented which are not really projects and considerable time can be wasted attempting to prepare profiles on the basis of these ideas. It is useful, therefore, for the field technician to sit with the group at the beginning of the profile stage and ensure that they understand what an investment project is, and what it is not.
In broad terms an investment project can be defined as follows:
"The expenditure of resources in the present, in order to generate benefits in the future"
The key elements of this definition are that resources (whether these be in the form of money, land, labour or other assets) are used in this year but that the benefits come in future years. If benefits are generated in the same year but not in the future (e.g. fertilizer to be applied to a current crop), this is not an investment project, but rather the purchase of inputs for current operations. Most investment projects generate a stream of benefits; that is to say, a single investment now will result in benefits being produced each year for a number of years into the future. It is also important to remember that the future benefits do not have to be directly in cash earned, and may not even be in a form that is easy to define. The benefits from building an access road to a village can be substantial, but they are often difficult to define clearly, and may include such elements as: (i) better access for local people to social services in the nearest town; (ii) easier and cheaper delivery of inputs to the community; (iii) easier shipment of products from the community to external markets; (iv) establishment of new businesses in the community and; (v) reduced outmigration of young people who no longer feel so isolated, and who now have improved employment opportunities at home.
Not all results of an investment may be positive. In the example given above, the access road may also result in faster deforestation around the community and increased erosion on slopes crossed by the road. For this reason, the design of a project may need to include measures to reduce these negative effects.
Under the definition given above, expenditures on education and training can be classified as an investment project, as they involve dedicating resources now (to train a person), and produces benefits in the future (as the person applies his or her training). While this is theoretically correct, many financing agencies are reluctant to fund local investment projects that are completely based on education and training. In part this is because it is difficult, if not impossible, to ensure that the person stays in the position of activity for which he or she was trained. If they leave, the benefits of their training go to their new employer or activity somewhere else, possibly in another country. Secondly, it is much easier to monitor and control investment activity when physical objects are involved. If the project is to build a greenhouse for flower production, for example, it is relatively easy to check that the greenhouse has in fact been built. That is not to say that training cannot comprise a part of an investment project - in fact it is often an important element of many projects. However, in such a case training costs are just one element in a larger investment.
There are three principal stages in the preparation and use of investment profiles: (a) the identification of possible investment projects; (b) the definition and preparation of project profiles for those investments, and; (c) the use of those profiles to undertake a preliminary assessment of the project proposed. Each of these is discussed briefly below.
Although a local development plan or similar tool should clearly identify the areas of priority for the group or community, it will often not define specific projects that will achieve this end, and even less frequently will it detail the investments that will make those projects a reality. As a result, it will generally be necessary for the community development officer, extensionist or other field technician working with the community to call one or more participatory sessions to identify the specific interventions that would best respond to the needs identified by the community in their local planning process.
This may well require helping the members of the group to understand the nature of a project and its underlying investment, as well as keeping the group realistic about what can and can not be achieved; for example, if the community is remote, with no vehicular access road or other government services, it is unlikely that a hospital is a serious option (although a community clinic may well be).
It is recommended that the community or group identifies an initial list of perhaps 3-5 possible projects, as not all will likely prove to be feasible - even at this initial stage - and some proposals may re rejected by the financing agency as not meeting one or more requirements for eligibility. For example, a scheme to provide potable water may appear feasible and be accorded a high priority by the group, but may require an investment per beneficiary that is beyond the maximum amount previously established by the funding source.
Such a case illustrates the importance of making clear to the participants at an early stage of the profile selection stage any restrictions that may exist as to the nature, use and extent of financing available. Some funds are reimbursable, and are thus restricted to investments that will generate an income stream to repay the loan. Many financing sources require a contribution from the group or community, but the level of this contribution may vary according to project type. Again, few funds will finance activities that are environmentally harmful, but the definition of harmful may also vary substantially from agency to agency.
The heart of Module 2 is the preparation of the project profiles. It is critical that this takes place within the community or area where the applicants live, and that preparation is not moved for the sake of convenience to the offices of the technical agency, where only a handful of villagers (at best) will attend, and even then may well feel intimidated by the unfamiliar surroundings. No elaborate equipment is necessary for this work; although flip charts or blackboards are useful, they can easily be substituted for by large sheets of paper attached to the wall of the schoolroom, meeting hall or private house, using sticky tape or tacks. When using paper, thick markers are necessary, as most of the group will have trouble seeing names and numbers written with a normal pen.
In the early stages of using RuralInvest, many doubted that rural people, often largely illiterate, could really contribute to, and understand, a project proposal and analysis. Our experience has clearly shown that this is not true. While not all participants may be able to read the individual items written on the board - a sewing machine, for example, or an irrigation pump - they will certainly understand the numbers put against them. We will return to this topic again when we discuss the assessment phase of the Module.
It is important that, where possible, the members of the group do their own investigations as to costs and prices related to the idea they are putting forward, and do so before the session at which the project profile is prepared. If a group believes that a community-run river transport company would contribute significantly towards resolving key constraints within the area, then they had better have some understanding of how much launches, outboard motors and fuel will cost. Of course this is not always possible; when project profiles were prepared in indigenous communities in Ecuador, there was much interest in providing electricity for lighting and the pumping of water using solar panels, but it would be too much to expect that these communities would have expertise in this area - outside experts had to be consulted to provide basic information on the cost, durability and capacity of such panels. Even so, there were many other costs associated with the schemes, such as stringing public lights along the main thoroughfare, the water pump and the water tower, that certainly were within their ability to define and cost.
Where the project proposal is not overly complex, and the group has done its homework beforehand, it is usually possible to prepare a project profile within a couple of hours - sometimes less. The complete group of 3-5 projects can often be dealt with in a single day, particularly if the community has previously selected different individuals or groups to find the required information on each proposal. On the other hand, if the key elements of the project have still not been agreed upon, and the group is ill prepared, a long and exhausting day may not be enough to properly prepare and assess a single project profile.
A number of basic indicators are used to provide a preliminary assessment of the project profile, and these are described and discussed in Section 5.6. Together, these measures provide a very rough and ready guide to the viability of the eventual project. Except in the case of very small or simple projects, they can not tell us whether or not a project is likely to be successful; too many details still unsettled, and too many factors left aside, for that to be possible. However, they do provide an indication as to whether it is worth dedicating the time and resources necessary to move from the profile to the full project stage.
Given the simplifications employed, if a project appears infeasible at the profile stage, it is unlikely to prove worthwhile later on. Thus projects that fail the simple tests applied at this level should be rethought, and either abandoned or restructured to respond to the apparent weaknesses.
The specific indicators used to assess a project profile vary according to whether the project is income generating or not; i.e. whether the project is justified on the basis of its profitability, or on its social, environmental or other non-monetary impact. For projects targeting profitability, costs must be less than income, and the net income must be enough to repay the initial investment within a reasonable period of time, as well as to fund the eventual replacement of the machinery and equipment employed. For non-income generating projects, the aim is to keep investment and operating costs per beneficiary within acceptable levels, and to identify sources of labour and money that will be needed later on for operating and maintaining the investment (school, road, etc.).
