Project identification

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Chapter three
Project Identifications
Introduction
The first phase of the project life cycle involves the identification of a need, problem or
opportunity and can result in customer’s requesting proposals from individuals, project team or
organizations (contractors) to address the identified needs or solve the problem. The first stage in
the project cycle is to find potential projects. It is the identification of investment opportunities.
Project ideas originate from various circumstances. A project may be designed to solve a
problem, to satisfy a need or to use available resources. Many projects are conceived just
because there is a ready market. In a poverty stricken community, a project may be identified to
cater to the needs of the poor. Where employment is a challenge, or where raw materials are
abundant, projects can be designed to use available labour and raw materials.
The search for promising project ideas is the first step towards establishing a successful venture.
Identification of investment opportunities requires imagination, sensitivity to environmental
changes, and realistic assessment of what the investor can do. The task is partly structured and
partly unstructured; partly dependent on convergent thinking, partly dependent on divergent
thinking. However, there is no well defined theory to guide the task of identifying project
opportunities.
To stimulate the flow of project ideas, SWOT analysis is helpful. It analyzes strengths,
weaknesses, opportunities and threats. SWOT Analysis represents a conscious, deliberate, and
systematic effort by an organization to identify opportunities that can be profitably exploited by
it. Periodic SWOT analysis facilitates generation of ideas.
Phases of Project Identification
There are four key phases of project identification. These are:
 Actual Project Identification: The generation of project ideas by formal and informal
institutions and individuals.

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 Description of Project Idea: An actual written description of the project idea or concept,
summarizing the main elements of the proposed project to use in the screening raking and
prioritization of project ideas.
 Screening: An initial review of project ideas and concepts to see if they should be
advanced or abandoned at an early stage.
 Prioritization: The tanking and selection of projects against a set of criteria to identify
the “best projects to move actively into the designed stage and development.
At identification stage an initial screening of project idea will take place, with some projects
ideas being abandoned as impractical or of a low propriety. A prelude to the full blown
feasibility study, this exercise is meant to assess:
 Whether the project is prima facie worthwhile to justify a feasibility study, and
 What aspects of the project are critical to its viability and hence warrant an in
depth investigation.
3.2 Sources of project ideas
Project ideas can emanate from a variety of sources. Much depends on the experience, and even
the imagination, of those entrusted with the task of initiating project ideas. In general, one can
distinguish two levels where project ideas are born: The macro level and the micro level.
1. Macro level, Project ideas emanate from, among others:
 National, sector or regional plans,
 Unusual events such as droughts, floods, earthquakes, etc
 Multilateral or bilateral development agencies,
 Regional or international agreements in which a country participates, etc
2. Micro level project ideas can emerge from;
 Existence of unused or underutilized natural and human resources and the perception of
opportunities for their efficient use.
 Identification of unsatisfied demand or needs

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 Need to remove shortage in essential materials, services, or facilities that constrain the
development effort etc
3.2. Methods of Project Identification
According to Ministry of Economic Development and cooperation, there are five methods for
identifying projects. They are the following.
1. Analyze major development problems
Development of a country depends heavily on the way of handling the problems related to
development. The development possibilities of the country together with the problems that
confront with the development should be analyzed thoroughly. The ideas for development and
the problems have to be listed down in their order of priority.
2. Analyze National Objectives
The stated objectives of the government (country) have to be analyzed to formulate projects.
The objectives of the country can be achieved only by formulating suitable projects. The
national objectives are always emerged on the basis of the social needs. In other words, a proper
analysis of the social needs is inheritable for identifying suitable projects.
3. Economic Analysis
The nature and type of trade in a country provides a number of opportunities for establishing
projects. Information on imports, exports etc. may be obtained from trade reports such reports
may also shed light the possible accessibility to the trade sector of other countries and the
investment opportunities in other countries. This information may pave the way for the
establishment of a number of projects inside and outside a country.
4. Natural Resource Survey
A survey on the natural resources of a country may facilitate for identifying a number of
projects. A country may also have a lot of unidentified natural resources. A part of the resources
that have already been known to the people might not have been properly exploited. Thus
surveys on both identified resources and unidentified resources are important sources of project
opportunities. Especially, agricultural and mineral projects depend heavily on natural resource
surveys.

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5. Socio-Spatial Approach to Project Identification
This approach for identifying projects usually employs the following.
a. Participatory Approach: The participatory approach of formulating projects is on the
belief that the projects should be formulated with the participation of the people. This
approach emphasizes that the first step in the project planning cycle is to consult the
population about the development needs of their area. Then, a situational analysis of
major development bottlenecks will be done with the participation of the people. As a
result, many key projects which are very essential for the people, could be identified.
Since these projects are formulated with the participation of the people, they will have
more acceptability and commitment of the community.
b. Area- based functional Analysis: This approach is to identify package projects or
complementary projects for a particular area, village, district or community. These
projects usually aim at addressing problem of social and spatial inequalities. They may
also be part of the overall development plan of the region or the country.
3. 3. Project Concepts and Profiles
Once a project idea has been conceived, the next stage is to describe the idea so that it can be
prioritized and move on to the next stage in the process. This may involve the preparation of a
project identification report or project concept or profile. Whenever it is developed it is
essential to have a clear idea of what the proposed project is supported to be and what are hopes
to achieve. It should include answers to the questions:
Justification and Purpose
 What goal is the project contributing to?
 What is the purpose of the project, what does it intend to achieve?
 What problem is the project addressing?
 What is the justification of the project?
 What demands, needs or opportunities is the project addressing?

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Beneficiaries and Stakeholders Best regards,
• What will benefit from the project?
• Who has a share or s take in the project?
• How have project beneficiaries and other stakeholders participated in the identification of
the project?
• Which institutions are the targets of the project?
Resource and Institutions
• What potential resources may be available for implementing the project?
• Which organizations are to be involved in project planning and implementations?
Policies and Plans
• How does the project proposal fit into any sector or regional plans?
• Does the project fit into current policies?
Impacts
• What are the likely major positive and negative social impacts of the project?
• What is the likely positive and negative environmental impact of the project?
Support
• What is the level of political and administrative support for the project?
• Does the project have the support of beneficiaries and/or local communities?
Risks
• What are the chances of the project achieving its objective?
• What are the main risks associated with the project?
• What assumptions have been made, e.g., what support is needed for others?
3.4 Preliminary Screening
By using the suggestions made in previous sections, it is possible to develop a long list of project
ideas. Some kind of preliminary screening is required to eliminate ideas which are not promising.
For this purpose, the following aspects may be looked into:
Compatibility with the promoter: The ideas must be compatible with the interest, personality,
and resources of entrepreneur.
Consistency with government policies: The project idea must be feasible given the national
goals and governmental regulatory framework.

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Availability of Inputs: The resources and inputs required for the project must be reasonably
assured.
Adequacy of the Market: The size of the present market must offer the prospect of adequate
sales volume. Further, there should be a potential for growth and reasonable return on
investment. To judge the adequacy of the market the following factors have to be examined.
_ Total present domestic market
_ Competitors and their market share
_ Export market
_ Sales and distribution system
_ Projected increase in consumption
_ Barriers to the entry of new units
Reasonableness of Costs: The cost structure of proposed project must enable it to realize an
acceptable profit with a competitive price.
The following should be examined in this regard:
_ Cost of material inputs
_ Labor cost
_ Factory overheads
_ General administration expense
_ Selling and distribution costs
_ Services costs
_ Economics of sale
Acceptability of Risk Level: The desirability of a project is critically dependent on the risk
characterizing it. In the assessment of risk – a difficult task, indeed – the following factors should
be considered:
Vulnerability of business cycle
Technological changes
Competition from substitutes
Competition from imports

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3.5 Prioritization & Ranking
The limited resources available mean that effective project identification and selection at various
levels will be essential. There will be more ideas for potential projects than resources available.
Potential criteria for ranking projects are given in the box below.
Examples of Criteria for Ranking Project
Extent
• Number of people and Geographic area affected by the project-more people affected means the
project will be given more weight.
Economic and Financial
• Potential financial and economic benefits to the country or region and individuals.
Environmental; Impact of the project on Conservation of natural resources and more sustainable
land use
• Protection of natural resources (e.g., forests)
Social
• Contribution of the project to Poverty alleviation and Assistance to disadvantaged groups
Policy is the project in line with national policies
Resources
Availability of human resources to implement project
• Likely availability of funding from government, etc
Success or Failures
• What are the chance of the project successfully meeting its objectives?,
• What degrees of the risks are associated with the project that may affect its implementation?
Support
• Political support for project
• Community support and demand for project.
During selection process, each project can be assessed against each of the criteria to give a
rating. At this stage of the project cycle this more likely to be qualitative than quantitative.
Certain criteria can be given greater weighting to reflect the importance of the criteria in
determining the overall rank of the project.

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3.6 Identification of Commercial Project Ideas
The following are undertaken when ideas are identified for commercial or industrial projects
1. Generation of Ideas
2. Monitoring the Environment
3. Corporate Appraisal
4. Scouting for Project Ideas
5. Preliminary Screening
6. Project Rating Index
1. Generation of Ideas
SWOT Analysis: This represents a conscious, deliberate, and systematic effort by an
organization to identify opportunities that can be profitability exploited by it. Periodic SWOT
analysis facilitates the generation of ideas.
Clear Articulation of objective: A clear articulation and prioritization of objectives helps in
channeling the effort of employees and prods them to think more imaginatively.
Fostering a conducive climate: To tape the creativity of people and harness their
entrepreneurial urges, a conducive organizational climate has to be fostered.
2. Monitoring the Environment
Basically a promising investment idea enables a firm (or entrepreneur) to exploit opportunities in
the environment by drawing on its competitive strengths. Hence, the firm must systematically
monitor of environment and assesses its competitive abilities. The important aspects studied in
monitoring the key sectors of the environment are as follows:
Economic Sector: State of the economy, Overall rate of growth, cyclical fluctuations, Inflation
rate, linkage with the world economy, Trade surplus/deficits, balance of payment situation
Governmental Sector: Industrial policy, government programmes and projects tax framework,
subsidies, incentives, and concessions, import and export policies, Financing norms, lending
conditions of financial institutions and commercial banks
Technological Sector: Emergences of new technology, access to technical know-how,
receptiveness on the part of industry
Socio-Demographic Sector; Population trends, age shifts in population, Income distribution,
educational profile, attitude toward consumption and investment

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Competition Sector: Number of firms in the industry and the market share of the top few (four or
five); entry barriers; comparison with substitutes in terms of quality, price, appeal, and functional
performance; marketing policies and practices.
Supplier Sector; Availability and cost of raw materials and sub – assemblies; availability and
cost of energy; etc
3. Corporate Appraisal (analysis of internal situation of the firm)
A realistic appraisal of corporate strengths and weaknesses is essential for identifying investment
opportunities which can be profitably exploited.
4. Scouting for Project Ideas
Good project ideas – the key to success are elusive so a wide variety of sources should tap to
identify them. Here are some suggestions in this regard.
a. Analyze the Performance of existing Industries: A study of existing industries in terms of their
profitability and capacity utilization is helpful. This may indicate promising investment
opportunities – opportunities which are profitable and risk – free.
b. Examine Inputs and Output of Various Industries: Investment opportunities exist when:
Materials, purchased parts, or supplies are presently being procured from distance sources with
attendant time lag and transaction cost,
Several firms produce internally some components/parts which can be supplied at a lower cost
by a single manufacturer who can enjoy economies of scale.
c. Review Imports and Exports: An examination of export statistics is useful in learning about
export possibilities of various products.
d. Study plan outlays and Governmental Guidelines: Government’s proposed outlays in different
sectors provide useful pointers toward investment opportunities. They indicate potential demand
for goods and services required by different sectors.
5. Preliminary Screening by rating index
By using the suggestions made in the preceding sections, it is possible to develop a long list of
project ideas. Some kind of preliminary screening is required to eliminate ideas which are not
promising. For this purpose, the following aspects may be looked in to:

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 Compatibility with the promoter’s objectives
 Consistency with governmental priorities
 Availability of inputs
 Adequacy of market
 Reasonableness of cost
 Acceptability of risk level
Project preliminary screening is like pouring all the ideas into a filtering funnel. In the first
instance, all possible project ideas are listed (identified). Then some of them are eliminated and
few projects are screened for further analysis. After detailed study of few limited projects, one
project will be selected at the end.
Project Rating Index: When a firm evaluates a large number of project ideas regularly, it may be
helpful to streamline the process of preliminary screening. For this purpose, a preliminary
evaluation may be translated into a project rating index. The steps involved in determining the
project rating index are as follows:
1. Identify factors relevant for the project rating
2. Assign weights to these factors (the weights are supposed to reflect their relative
importance)
3. Rate the project proposal on various factors, using a suitable rating scale. (Typically a 5-
point or a 7-point scale is used for this purpose.
4. For each factor, multiply the factor rating with the factor weight to get the factor score.
5. Add all the factor scores to get the overall project rating index.
Example of project rating index
Assume that the following factors are identified to be relevant for project rating
Factors Factorweight
Technical know-how
Input availability
Reasonableness of cost
Adequacy of market
Stability
Dependence of firm’s strength
Consistency with government priorities
0.20
0.15
0.20
0.05
0.10
0.20
0.10