Chapter 8. Formulating a simple market project

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The intention of any market development project is to allow retailers to increase incomes, whilst also offering to consumers better produce at more affordable prices in conditions that are more convenient and hygienic. When formulating and implementing a project it is necessary to have a clearly defined purpose, whether it be for local funding by central or local government or a private entrepreneur or for financing by an outside donor.

Defining the purpose of a project

While there may be a distinct difference of emphasis between urban and rural markets, in both cases a project's desired outcome will be to improve the distribution and marketing of products, in particular perishable foodstuffs (including fruits and vegetables, meat, fish and poultry), with the purpose of enhancing the welfare of all the parties involved in the marketing chain.

Purposes of a project

To accomplish this overall purpose the results which the project are expected to achieve will need to be defined in detail. This is necessary in order to ensure that all the components or inputs for undertaking a project (including associated costs) are included in the development programme. A market project will usually have three basic objectives:

• improvement of the physical conditions and facilities in the market, including in many cases its immediate environs;
• improvement of the public health and hygiene conditions for the marketing of fresh produce in the market and (in some instances) improving the conditions for slaughtering animals; and
• establishment of an improved capability in marketing of fruit, vegetables, fresh meat, fish and poultry through the provision of an efficient and cost-effective market management system, including trained and motivated market staff and users.

Benefits of a project

An hygienic and efficient marketing facility brings about a range of clear public and private benefits which will be spread widely between producers, traders in the market and consumers. A description of these benefits are outlined in Chapter 1. Market sites are often public property and it is the duty of rural or municipal authorities to realise the maximum return that is compatible with efficiency, good order and hygiene.

The need for consultation with market users

The provision of modern premises and facilities resulting from a development programme will not on its own achieve improved conditions, unless the market's functionaries are also encouraged to rationalise their activities and to adapt themselves to new marketing techniques. Such changes in attitudes are an essential component of any programme and can only be attained through the provision of appropriate extension and training, as outlined in Chapter 7.

Whether the programme involves the creation of a new market or the upgrading of an existing one it is essential to establish a working relationship between the administration or developer carrying out the project and the market's users. If not approached in the right way a number of problems can occur. The following approaches should be avoided:

Assistance on its own: this can lead to a passive, "wait-and-see" attitude, with the market users losing any spirit of initiative and tending to expect the project to provide the solution to all of their problems. It may result in a general dissatisfaction with the project, and in market users objecting when their demands are not fully addressed.

There are costs associated with any assistance programme and a corresponding financial contribution should be expected from the retailers. Stalls and equipment provided by the project should be paid for by the market users. Wherever possible, the users should be the owners of the equipment. If they cannot afford the capital cost (even with access to credit) equipment should be rented on a daily or weekly basis. For example, in some places where fruits and vegetables were traditionally sold by the piece or by the heap, sales by weight have been successfully introduced by renting scales to retailers.

Intervention on its own: developing a new market or a programme for reorganization by initiating changes and introducing regulations without previous consultation with the users (and without extension and training programmes) can lead to distrust and rejection. Consequently, users may try to bypass the market rules and conditions for corruption' low performance, high user turnover and parallel markets may be created.

Mechanisms for user participation

Communication channels between the market's administration and those concerned in the marketing process, especially the traders, should be established from the outset. The method of management, the introduction of new laws and regulations, the expected changes in working methods and proposals for reorganization of the site, will all need to be agreed. This will allow the project to take account of users' suggestions, when compatible with the general interest, and also avoid the spreading of false rumours and the creation of resistance to change. This implies that during the survey and design stages of the project (see Chapter 3) the following steps should be undertaken:

• information is collected on retailers' activities (i.e. whether they are permanent or seasonal, trade in one or a number of products and their overall turnover), their financial and technical capability, their interest in further training and what improvements to the market they think are desirable;
• information is provided to the retailers on when (and where) the project is likely to start, who will undertake the works and manage the market, the basis for financing the improvements and the overall budget, a justification for the changes in service charges and level of activities expected as a result of the changes;
• discussions are held with the market users about selection criteria for the grant of licences and permits, revisions to market rules, overall organization, proposed changes to rents and charges, the availability of credit, interim measures where markets are being redeveloped or transferred and the content, dates, venues and duration of training programmes.

The best approach to establishing communication and cooperation between market authorities and users is the creation of a small advisory committee which meets at frequent intervals during the development period and includes representatives of the authority and every group of users including, if applicable, wholesalers and producers.

The formulation of a project

The essence of any formulation of a market development project is to enable the funder of a project (whether it is a local authority, a private company, a donor or a mixture of these) to make a decision on whether to go ahead with the programme. To achieve this it will be necessary to provide answers to two fundamental questions:

• if the programme is undertaken as envisaged, will the proposed increase in rents and charges cover the estimated cost?
• if the likely maximum rents and charges are already known, what is the total maximum amount of money that can be spent on improving the market?

BOX 11
The formulation of a simple market project

1. Overall master plan of physical requirements
2. Definition of off-site planning and infrastructure requirements
3. Budget capital cost estimates.
4. Estimate of recurrent costs
5. Estimate of revenues:

• daily licence fees or tolls
• annual or monthly rents; and
• long leases or sale of sites.

6. Calculation of economic and financial benefits
7. Impact evaluation of the project:

• impact on beneficiaries (producers, traders, consumers)
• income generation

8. Environmental impact and effect on special interest groups
9. Definition of project risks and follow-up actions (e.g. land title availability, detailed survey requirements, etc.)
10. Methods of project implementation and financing

In both cases the means of answering these questions is to undertake an analysis or feasibility study in which the costs and benefits of the project can be represented in financial and economic terms. The components of the formulation process are summarised in Box 11 and are explained in more detail in the following sections.

Components of a simple market project

Before the financial and economic analysis can be undertaken it will be necessary to assemble together all the information that has been collected and prepared in designing the project. The usual inputs or components that will need to be considered are described in the following sections.

Project capital costs:

Detailed budget estimates of capital costs of market improvement works will need to be prepared by an architect or engineer. These estimates will provide the basis for making an overall cash flow on a year-by-year basis. This budget may include new buildings, infrastructure and equipment and, in some circumstances, off-site requirements such as road links' bus stops, drainage outfalls, electrical, sewer and water supply connections.

This part of the preparation of a project should be undertaken as carefully as possible. Preferably, each component of the programme should be priced in detail on the basis of unit rates derived from recent contracts of a similar scale or, if applicable. using quotations obtained from manufacturers or suppliers (e.g. for equipment). It is usual to add a physical contingency sum of between 10 to 2() per cent to the costs to allow for uncertainties. If the nature of the estimate is very broad (i.e. no suitable unit rates are available) or the nature of the works is speculative, such as site preparation where the sub-soil conditions are unknown, then a higher percentage should be used.

Typical cost summaries are shown in Tables 8.1, 8.2 and 8.3. Table 8.1 illustrates the principal components included in an overall implementation programme for the development of fifty new periodic markets in Zimbabwe. Table 8.2 shows the costs for improving rural producer markets in Nigeria, contrasting the requirements for different scales of market yard and facilities.

TABLE 8. 1. Periodic market programme Zimbabwe

Source: MOLISV Rural services and periodic Markets in Zimbabwe. FM 1990.

TABLE 8.2. . Civil works for rural producer market improvements

Source: FAO Investment Centre. Nigeria Rural Roads and Marketing Project, 1993.

Table 8.3 illustrates the cost components for improving an urban retail market in Zanzibar which combines retailing of fish and meat in an enclosed building with the sale of fruit, vegetables and poultry in sheds or in open areas. In this instance, the costs are presented in only a summary form and each component would need to be supported by a detailed cost schedule. Two other features of Table 8.3 are interesting. First, it includes an allowance for professional fees, as the work is of sufficient complexity to require the employment of outside consultants; and, second, a significant amount of the budget (over 30 per cent) is allocated to off-site works. Such a provision is frequently required in the case of upgrading of urban markets, particularly for roadworks and drainage. In the Zanzibar case, to omit the off-site works would not have allowed a viable project to be developed.

More detail on the types of cost elements and how they should be estimated is given in Chapter 10 of the Wholesale Markets Planning and Design Manual (FAO, 1991).

TABLE 8.3 Capital costs for urban retail market upgrading

Project recurrent costs:

In addition to the capital costs of civil works and equipment it will be necessary to estimate the annual recurrent or running costs of the market, and to include the cost of any training programme or other special promotions that are proposed.

These costs may increase or decrease as a result of the market improvement. An increase will occur if more staff are employed or if additional services are used, such as electrical power as a result of introducing internal or external lighting. Running costs may decrease if a rationalization of management results in reduced staffing requirements or if the improved infrastructure might result in reduced cleaning, maintenance or insurance costs.

Project revenues:

the next step will be to consider what additional revenues the market improvements will produce. There are two basic approaches to making such estimates. The first method is to raise charges so that they are in line with comparable properties or facilities elsewhere. The second method is to estimate the increases on the basis of the additional trade that the market is likely to generate as a result of the improvements and of income and demographic growth, i.e. to relate the charges to market turnover (in which case detailed projections of future volumes are essential). In practice, it is best to use a combination of the methods, checking one against the other and looking at the impact of the changes on the retailers' margins.

Rents that owners of small retail businesses are willing to pay vary directly with the amount of passing pedestrian traffic and are uniformly higher on street corners and the outer edges of markets, than the middle of blocks.

The revenue components that are likely to occur at typical markets and need to be included in the financial analysis are the following:

• daily tolls or licence fees, typical for casual traders in street markets;
• annual or monthly rents for market stalls or space within a covered market or street market pitches;
• long leases on premises constructed as part of the market development;
• selling of sites for traders to build their own facility; and
• charges for services such as grading and packing, use of special equipment, parking fees and cleaning services.

Economic and financial benefits

When the information on project costs and revenues has been assembled it will be possible to undertake a financial and economic analysis. The distinction between the two types of analysis is that a financial analysis evaluates the commercial worth of a project to its owner (effectively the market authority or private entrepreneur), whilst an economic analysis assesses a project's worth from the viewpoint of the whole economy. In the latter case, the costs are adjusted to account for any distortions, such as subsidies, taxes and transfer payments, and the benefits are not necessarily quantified on the basis of the market's income but on measures such as reductions in produce losses or time savings due to reduced traffic congestion (i.e. the types of benefits that are outlined in Chapter 1 ).

The approach normally adopted for project analysis, particularly when there is a bank or external funding agency involved, is to undertake an investment analysis using discounted cash flows. The normal measures used are the "net present value" of a project (NPV: the present value of a cash flow stream over the project life), the "benefit-cost ratio" (BCR: the ratio between the present values of the benefits and the costs) and the "internal rate of return" of the project (IRR). The latter is usually the main criteria that is used and is a measure of the rate of return of a project when the NPV is equal to zero or the BCR is equal to one. The IRR reduces the assessment of the project to a single percentage and therefore makes a comparison between different options and cost/benefit assumptions easy to make.. Normally a minimum return of 10 to 12 per cent is required for a project to be considered viable.

The calculation procedure works in current prices (i.e all costs are expressed in prices prevailing at the time of the analysis). The calculations are quite straightforward, but relatively laborious if calculated manually and a financial calculator or spread-sheet package on a computer is normally used. Details of how to undertake such analyses are outlined in Price Gittinger ( 1972) and Abbott ( 1986).

Where complex projects are being analysed it is essential to use this classical approach and to seek the assistance of an economist. Instances of when this will be necessary are when the investment level is high (such as a new covered urban market), where there are many options available to consider (such as when there are different sites to choose from) or when the benefits of a project are difficult to assess (such as when a new or improved rural assembly market is being planned, where it is necessary to consider the impact of the market on other rural markets, on rural roads and on the overall agricultural production system).

However, in many cases, for instance a small rural market or an urban street market, a simpler approach can be used. Box 12 contains details of a calculation method, based on obtaining roughly a 20 per cent return, which only requires a normal calculator. Such a method is highly appropriate if the investment in market improvements is being locally funded. This approach to project analysis ignores discounted costs and is suitable for checking whether the level of investment matches the incremental increase in rents and other revenues.

The essence of the simplified approach is that it uses a concept familiar to the lay-person of a return on capital (i.e. how many years will it take to cover the capital cost). The greater the security of income and capital, the greater is the certainty of the income being received and, therefore, the lower will be the forecast yield that would be accepted by the bank (and vice versa). The other virtue of adopting this approach is that it is understandable by a local bank manager, accountant or real estate agent. Therefore, it may be a useful method if a bank loan has to be obtained or a broad valuation has to be made of the existing market site so that it can be used as security.

Evaluating the overall impact of a project

The methods of financial and economic analyses described above can be used to provide a quantitative description of a project. By using the more complex (classical) techniques it will be possible to test the assumptions used in analysis - usually referred to as "sensitivity testing" - such as extending or shortening the project life, increasing the capital or recurrent cost estimates, reducing the income expectation, varying the interest rates or including additional costs (e.g. technical assistance and training). An example of such an analysis and sensitivity testing is shown in Table 8.4.

BOX 12
Assessing the viability of a simple market project

1. Add together all the expected annual rents, revenues and notional profit.
2. Deduct the value of any existing total annual rents and revenues.
3. Deduct any additional annual recurrent costs (e.g. electricity, water, etc.)
4. Multiply the result by 5 to obtain a value for 5 years total net revenues (if the project is less risky and/or a high return is not expected multiply by 10 for 10 years revenues, i.e. equivalent to a 10 % yield).
5. Estimate the total costs of buildings, infrastructure and equipment, plus the existing site value or cost of site acquisition (if applicable).
6. Compare the total net revenues (4) to the budget capital cost estimate (5). If they are roughly equal then the project is viable.
7. If capital cost exceeds the revenues increase the annual or monthly rents.
8. If this looks to produce rents that traders will not be willing to pay (discuss with them the new rent levels) review the project and reduce capital costs.

TABLE 8.4. Al Husainiah assembly market economic analysis

Source: UNCDF Project No. YEM/91/C02 (Fruit and Vegetable Market in Al-Husainiah, 1992)

Using these techniques it is also feasible to investigate the different design and management options for market development. These options might include, for example:

• assessing whether a market should be relocated to a new site;
• restricting the expansion possibilities of an existing street market;
• introducing a new market in competition with existing outlets;
• investigating the impact of different user charging structures, including the effect of introducing subsidies; and
• assessing whether it might be worth introducing specialised facilities, such as packing facilities at a rural assembly market, or cool storage for meat and fish in a covered urban market.

However, this analysis may not provide all the information to enable the local authority or private entrepreneur to make a decision whether to go ahead with a project. Thus, in addition to a quantitative analysis, the formulation of a project should also include a technical statement of its overall impact.

This statement should incorporate a clear description of the advantages and disadvantages of a project; who will be its beneficiaries (i.e. producers, traders, consumers); how the project might provide additional income generating opportunities; what effect it might have on special interest groups (e.g. children, women, urban poor and the physically disabled); its potential environmental impact; what potential risks exist; sources of financing; and how long it will take to implement the project. Some of these factors are described in greater detail below.

Environmental and social impact

Market projects if well designed and formulated should not have any negative effect (or "impact") on the environment or local population. Environmental and social issues that might arise with a market development are shown in Table 8.5. This example applies to the improvement of a covered meat and fish market and an open fruit and vegetable retail market in an urban conservation area.

TABLE 8.5Environment and social impact

Source: UNCDF Project No.. URT/93/C06 (Renovation of Zanzibar Stone Town Market. 1994)

A social issue that may need special attention is the impact of a development programme on employment. Relocating or reorganising a market may create difficulties for existing employees and there may be job losses due to nationalization. Certain categories of people may not be able to move when a market is relocated from an inner city area to the suburbs. Porters may not be able to travel to a location poorly served by public transport and female stallholders may experience difficulties if the new facilities are remote from their children. In both cases, special provision may be justified, such as a market mini-bus, a crèche or nursery.

The potential negative impacts of a market project usually relate to the actual development of the site and its environs, rather than to a wider area. Any impact can be ameliorated, but at a cost. It is better, therefore, that they are recognised at the outset and accommodated. The following main types of impact may need special attention in the preparation of a master plan and in the development of market management policies and procedures:

• additional traffic congestion if road and junction improvements, parking or traffic management measures are not implemented;
• potential flooding and water table problems, caused by increased surface water run-off from a completely paved market site, if a comprehensive drainage system and outfall is not implemented;
• glare and noise impact on the surrounding land uses, particularly if insulation, screening and tree planting proposals are not carefully integrated into the development programme;
• inadequate management provision for environmental matters and for the recurrent maintenance of buildings and equipment, including lack of emergency and safety plans, poor handling of fuels, high energy use and refrigeration misuse; and
• poorly implemented solid-waste management measures, resulting in a build up of refuse and attendant rodent or insect infestation.

Project risks

There are always risks attached to any market development and these will influence its detailed formulation and design. The usual matters which must be resolved before a project can progress, are that the selected site or extended site must be secured, funding must be available, agreement must be reached on institutional issues and methods of management, and basic surveys, planning and feasibility studies must undertaken. To find a sustainable development solution it may be necessary to review a local authority's whole budget management approach, particularly if it is intended that a market is to be managed as an autonomous operation.

The issue of site availability is often one of the main constraints, where the use of compulsory acquisition powers is not possible, and the delays that it may cause should never be underestimated. It is very important that the ownership of title to the land is clarified and that the relevant planning and building consent permissions from urban or rural authorities are obtained.

Medium-term risks, which can cause major problems in the effective operation of a new market or reorganization of an existing market, include delays in appointment of a market manager and other staff, a lack of suitable training courses, and lack of working capital for operation, staff salaries and recurrent maintenance. The main long-term risk is that the turnover targets for the market have been too optimistic, casting doubts about a market's overall viability.

Project design should recognise these risks and be developed so as to minimise, or at least reduce, them to an acceptable level. Some risks will remain, particularly if some of the project's components are not implemented or are delayed. This may occur if initial finance and technical assistance is not available. Some risks cannot be eliminated because they depend on how the potential users of the market react to the introduction of new methods and charges. The only way this risk can be minimised is if the trader's associations are involved from the outset in the design and formulation of the project. In developing a "robust" project design, adequate survey and effective long-term monitoring is also essential.

Implementation and financing arrangements Another essential step in formulating a project is to establish how it will be implemented. There are two facets to implementation: financial and practical.

Financial: It is obvious that a guaranteed source of funding must be secured. External grants may be possible, but the small scale of many market development projects, especially those involving the improvement of an existing market, may make them unattractive to potential donors or banks. Ultimately, a project may be self-financing from fees and charges, including annual auctions of rental space.

However, the initial capital requirement is the main problem. All possible sources of funding should be explored, including:

a) special government grants, such as those available for small business promotion and environmental improvements;
b) a joint-venture with private enterprise, which might include the present traders at a market (as individuals or groups);
c) leasing the whole or part of the site to private entrepreneurs, but still maintaining some control over licensing arrangements; and
d) cost-sharing, with a donor, other government departments or private enterprise, for example as part of a general area upgrading project. An interesting variant of this was used in Samarinda in East Kalimantan, Indonesia, where a private developer used a cross-subsidy scheme to finance construction of booths for street traders with revenue from leasing out shops to merchants. Cost sharing can take the form of capital contributions or other forms of equity, such as the provision of land.

Practical:

Methods of implementing a project should be thought about right from the outset as the approach adopted will influence the length of time that will be required for undertaking the works (and possibly have an impact on the traders' income).

A formal contractual arrangement with one or more private contractors is likely to be the most rapid approach. However, this may not be possible in remote rural conditions or it may conflict with the social objectives of a project. In Bangladesh, for example, the Intensive Rural Works Programme used landless labourers, marginal farmers and women's groups to implement rural market improvements.

An alternative approach, which also reduces the capital funding requirements, is the use of self-help schemes, involving the traders themselves. The most feasible option is a "sites and services" approach, where only quite rudimentary infrastructure is provided and the traders are expected to finish off the construction.

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