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THADOMAL SHAHANI ENGINEERING COLLEGEDepartment of Chemical Engineering

Class notes forPEM prepared byProf. Sanjay Dalvi

For private circulations only. Revised on Jan 2009 1

CONTENTChapter 1: Introduct ion 4

1.1 Concept of Project: 41.2 Characteristics of project: 41.3 Project family tree: 41.4 Category/Characterisation of project: 41.5 Project life cycle phases: 5

1.6 Project life cycle curve: 71.7 Cumulative growth chart: 71.8 Project visibility: 81.9 General causes of overruns: 8

1.9.1 Pre-feasibility study phase: 81.9.2 Evaluation phase: 81.9.3 Technology selection and engineering phase: 91.9.4 Contracting and procurement phase: 91.9.5 Construction phase: 91.9.6 Start-up phase: 91.9.7 Common in all phases: 9

1.10 Definition of Project Management: 101.11 Features of project management: 10

1.12 Project Manager (PM): 101.12.1 Duties of PM: 10

Chapter 2: Project Initiation 112.1 Proof of fully established project: 112.2 Feasibility Report: 11

2.2.1 Raw Material survey: 112.2.2 Demand study: 112.2.3 Technical Study: 122.2.4 Location study: 122.2.5 Financial arrangement: 142.2.6 Preparation of cost estimate: 15

2.3 Project Profitability: 162.3.1 Pay back period: 162.3.2 Return on Investment (ROI) 172.3.3 Net Present Value (NPV) 172.3.4 Internal Rate of Return (IRR) 172.3.5 Benefit Cost Ratio (BCR) 17

2.4 Numerical Examples 172.5 Phases of Technology Transfer (TT): 18

2.5.1 Selection: 182.5.2 Source searching: 182.5.3 Negotiation: 192.5.4 Contracting: 19

2.6 Forms of TT: 192.6.1 Licensing: 192.6.2 Outright purchase: 192.6.3 J oint venture: 192.6.4 Buy-back agreement: 192.6.5 Loan agreement: 192.6.6 Plant operation and management TT: 192.6.7 Consultancy contract: 202.6.8 Other contracts: 20

2.7 Activities in technological package: 202.7.1 Compilation of project data: 202.7.2 Process design: 202.7.3 Basic engineering: 202.7.4 Detail engineering: 21

Chapter 3: Project Licensing & Patent 223.1 Project Licensing & Clearances 22

3.1.1 Procedure for Licensing: 223.1.2 Foreign collaboration Approval: 223.1.3 Approval for appointment of foreign consultant: 23

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3.1.4 Import of capital goods: 233.1.5 Import policy: 233.1.6 Environmental/ Pollution control clearances: 243.1.7 Railway clearance: 243.1.8 Electricity clearance: 253.1.9 Forest clearance: 25

3.2 Intellectual property: 25

3.2.1 Patent: 263.2.2 Rights granted and rights not granted: 263.2.3 Governing laws 263.2.4 Examination process and procedure 263.2.5 Term of patent 273.2.6 Example 273.2.7 Miscellaneous 27

Chapter 4: Project Organisations & Planning 284.1 Project organisations: 28

4.1.1 Project Manager as a Staff Assistant to the Chief Executive: 284.1.2 Consultant as a Project Manager: 284.1.3 Project Manager as a specialized staff function: 28

4.1.4 Matrix organization: 294.1.5 Task Force Organization: 304.1.6 Totally Projectised Organization: 30

4.2 Team Building: 314.2.1 Seven Cs for Team Building: 314.2.2 Teams Success: 31

4.3 Work Breakdown Structure (WBS): 324.3.1 Hardware Oriented WBS: 324.3.2 Agency Oriented WBS: 334.3.3 Function Oriented WBS: 33

4.4 Contracts: 334.4.1 Business contract: 334.4.2 Three Rs of contracting: 34

4.4.3 Contract planning: 364.4.4 Tendering and selection of contractor: 36

Chapter 5: Project Scheduling 385.1 Project Implementation schedule: 38

5.1.1 Time estimate: 385.2 PERT (Project Evaluation & Review Technique): 39

5.2.1 Definitions: 395.2.2 General guidelines to draw network: 405.2.3 General guidelines to number the events on network: 405.2.4 Earliest Expected Time (EET): 405.2.5 Latest (allowable) Occurrence Time (LOT): 415.2.6 Slack: 41

5.2.7 Time scaled network/ Squared network/ Activity-time schedule: 415.2.8 Critical Path: 41

5.3 Critical Path Method (CPM): 425.4 Project cost analysis: 42

5.4.1 Crashing of Network: 435.5 Gantt Charts: 44

5.5.1 Advantages: 445.5.2 Disadvantages of Gantt chart: 45

Chapter 6: Project Monitoring & Control 466.1 Material Management: 466.2 Inventory Control: 46

6.2.1 ABC Analysis: 466.3 Value Engineering and Design (VED) Optimisation analysis: 476.4 Time and Cost control Tools and Techniques: 47

6.4.1 Schedule control: 486.4.2 Cost control: 496.4.3 Fund flow control: 49

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6.5 Economic Order Quantity (EOQ): 496.5.1 EOQ problem with no shortages: 496.5.2 EOQ problem with no shortage and unequal purchase runs: 516.5.3 EOQ with shortage 52

6.6 Commissioning: 546.7 Start-up: 546.8 Stabilisation: 54

6.9 Close-out: 54

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Chapter 1: Introduction

1.1 Concept of Project:

Project is generalized term used for time restricted task. Project is not always a new task but sometimes it may be an improvement over existing

system.

It is not a physical object. Any idea to be implemented must be technically feasible, economically viable, politically

suitable and socially acceptable. Once the idea passes these tests, an investment proposal ismade. When the investment proposal is approved, the project commences.

A project is initiated to achieve a mission. A project is a combination of human and non-human resources pooled together in a

temporary organization to achieve a specific purpose.

1.2 Characteristics of project:

Approach of grouping of work in any work environment is termed as Projectisation of work. The special features of a project are as below,

1. objective

2. life span3. single entity4. team work5. life cycle6. uniqueness7. change8. successive principles9. made to order10. unity in diversity11. high level of sub-contracting12. risk and uncertainty

1.3 Project family t ree:

Fig.1.1: Project family tree

1.4 Category/Characterisation of project:

Location, type, technology, size, scope and speed are normally the factors which determine theefforts.

Plan

Program(Not time limited.

Approach is same asproject)

Project

Work package(Subset of project)

Task

Activity

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Fig.1.2: Characterisation of project

1.5 Project life cycle phases:

1. Conceptive phase:

Project idea germinates. The idea need to be examined in light of objectives and constraints and what finally becomes

acceptable may form the future project. Consideration towards project implementation is not done in this phase. It is quite possible that idea may undergo some changes as the project progresses.

2. Definition phase: Covers all aspects necessary for the customer and/or financial institutions to make-up theirminds on project.

For example:i) Raw Material: qualitative and quantitative analysis.ii) Plant size/capacity.iii) Location and site: with map.iv) Technology/process selection: with reasons.v) Project layout: with reasons.vi) Plant & machinery: selection and specification with cost.vii) Electrical and instrumentation work: power distribution.viii) Civil engineering work: selection & cost.ix) Utilities: fuel, power, water with quality & cost.

x) Manpower & organizational pattern: organizational structure.xi) Financial analysis: investment cost.xii) Implementation schedule.

This phase make interactions with non-technical people, mostly. Survival of project depends on this stage.

Project

National International

Non-Industrial Industrial

Non-conventional/R&D

High Technology ConventionalTechnology

Low Technology

Mega Major Medium Mini

Grass-root ModificationExpansion

Normal Min. cost High quality Long period

Disaster Gaining in time is most important. High capital cost. Very low project time.

Crash Max. overlapping Short period i.e.

saving in time.

Increased cost

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Too many technical details should be avoided while making a feasibility report.

3. Planning & organizing phase:

This phase overlaps so much with the definition and also implementation phase. Sometimes it is called as project execution plan. Activities during this phase

i) Project infrastructure & enabling services,

ii) System design and basic engineering package,iii) Organizing and manpower allotment,iv) Schedules and budgets,v) Licensing and government clearances,vi) Finance,vii) System and procedure,viii) Identification of Project Manager,ix) Design basis, general conditions for purchase and contracts,x) Site preparation and investigation,xi) Construction resource and materials,xii) Work packaging.

This is an important stage, to be completed before implementation.

4. Implementation phase: This is a period of hectic activity for the project. Project is physically visible in this phase. Work done generally during this phase is,

i) Preparation of specifications for equipments and machinery,ii) Ordering of equipment,iii) Lining up construction contractors,iv) Issue of construction drawings,v) Civil construction and construction of equipment foundations,vi) Equipment and machinery erection,vii) Plant electrical, piping, instrumentation, testing, checking, trial runs, and commissioning

of plant take place during this phase.viii) 80 to 85% work is done in this phase.

0 2 4 6 8 10 12 14

Start-up

Construction

Delivery

Ordering

Detailed engg.

Weeks

Fig.1.3: Activity overlapping

5. Project clean-up phase:

Hand over of plant is done during this phase. Drawing, documents, files, operation and maintenance manuals are catalogued and handed

over to the customer. Finishing and patch-up work. Project accounts are closed. Outstanding payments made and dues collected during this period. Project personnel are replaced gradually by production people. First design engineers go off. Customers engineers replace the project engineers.

Residual engineers give training to the customers engineers; look after break-downs if any,for a limited period after the hand over.

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1.6 Project life cycle curve:

GROWTH MATURITY

DECAY

Conceptphase

Definitionphas

e

Planning&Organising

phase

Implementationphase

Clean-upphase

85% efforts

8% efforts

4% efforts 3% effortsTime

Levelofefforts

Fig.1.4: Project life cycle curve

Efforts build-up is very slow but efforts withdrawal is very sharp. Time (formative +clean-up) >time (implementation). A life cycle curve represents a class of project. Knowledge of characteristic life curve enables a project manager to ascertain the state of health

of any project at any point of time.

1.7 Cumulative growth chart:

Cumulative Growth chart

0

20

40

60

80

100

0 6 12 18 24 30 36 42 48 54 60

Time in weeks

%Progress

Detailed Engg Ordering Delivery

Construction Startup Fig.1.5: Cumulative growth chart

Line of balance (LOB) represents the state of health of a project. Cumulative growth chart is prepared for each activity. Which is always S shape curve.

Project manager has to prepare two cumulative growth charts: one for predicted progress andother for actual progress.

On the cumulative growth chart of predicted data if a vertical line is drawn at present time itwill give the current progress of each activity as per prediction. Where as the same procedurefor actual chart will give the actual current progress of each activity. Plotting this data on barchart gives the Line of Balance (LOB), as shown in fig.1.6.

LOB is the best tool to keep control over schedule. It is very easy technique to watch the

progress of any activity can be read by any person who is unaware of managerial tools andtechniques.


But on other hand it is very difficult to quantify each and every activity. Also getting data foreach activity is sometimes impossible and project manager has to predict this data based onhis/her experience. This adds up the error in measuring the progress. Therefore LOB aloneshould not be used affirmatively to measure the team members performance.

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Line of balance for 24th Week

0% 20% 40% 60% 80% 100%

Detailed Engg

Ordering

Delivery

Construction

Startup

% Progress

Fig.1.6: Line of Balance (LOB)

1.8 Project vi sibility:

Fig.1.7: Project visibility

A project can not be seen for most of its life time. At same stages proof of progress is not possible. This is non-visibility of project. At any point in the life cycle something will be clearly visible, something nearly visible, but the

rest will still have to be imagined. A project abandoned in-between has zero value; the full value of the project is realized only at

the end.

1.9 General causes of overruns:

The reasons of the overruns of project are different in different phases.

1.9.1 Pre-feasib ili ty study phase:

Delay in land acquisition, forest clearance, and environmental clearance. Delay in clearances from financial/regulatory bodies of the government. Lack of infrastructure facilities. Failure in planning for important resources, facilities, tie-ins & inputs needed for timely

construction and putting into operation. Selection of incompetent consultant.

1.9.2 Evaluation phase:

Inadequate project study; understatement of scope and underestimate of cost & resources,calling for subsequent changes in scope of the project; non-freezing of specifications; andrevision of budgets.

Political influences, in site selection. Consultants and project authorities inadequacies, leading to wrong economic studies and

misleading fund flow statements and projections causing financial barrier.

t1

t2t3

t4

Idea

Project life cycle

Reality

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1.9.3 Technology selection and engineering phase:

Poor and outdated technology acquisition. Technological tie-ups more on considerations of credit offered by the supplier rather than of

technical necessities. Starting of detail engineering and preparation of shopping lists before finalizing process

flowsheets and line diagrams. Delay in completing detail engineering; lack of design data; delay in the freezing of design

and specifications; absence of an engineering schedule, leading to delay in the release ofdrawings for procurement.

Inefficient procedures for scrutiny, approval and transmittance of drawings and specifications.

1.9.4 Contracting and procurement phase:

Delayed and careless preparation of bid documents. Poor selection of vendors/manufacturers/fabricators/suppliers or contractors and preferential

treatment to public sector enterprises, on the basis of government guidelines. Delayed placement of orders. The practice of accepting the lowest quotation, irrespective of the vendor quality and/or

contractors competency. Delay in the opening of letters of credits and issuance of various guarantees by foreign

suppliers. Time-consuming procedures concerning the procurement of imported raw materials and hi-

tech components by Indian manufacturers of equipment. Inadequate speed in actions. Lack of integrated action plans closely involving suppliers and contractors. Delay in the supply of critical equipments. Lack of proper quality control arrangements. Changes and modifications without cost benefit analysis. Poor logistics planning.

1.9.5 Construction phase:

Very early starting of construction activities that are before ensuring the availability of working

drawings, storage and preassembly space, sequential supply of equipment and materials andadequate infrastructure. Delay and/or inadequacy in contractors mobilization. Poor planning by contractors. Failure to assure contractors of law and order in the project area. Contractors low productivity and consequent financial problems. Inefficiency of contractors, in both the public and private sector. Hold-up resulting from delays in interconnected activities, because of the absence of

integrated management. Belated clearances. Indecisions and delayed decision making. Bad quality control. Unfair treatment to contractors and suppliers.

Delay in reimbursement.

1.9.6 Start-up phase:

Delay in inputs like special tools, first fills, manuals, services and feedstock. Absence of commissioning specialists. Failure of equipment or parts. Design changes. Defects in erection and installations.

1.9.7 Common in all phases:

Weak project team. Indecision. Lack of managerial talent. Discontinuity of efficient team members. Absence of personal accountability and commitment. Undue job security and resultant indiscipline. Lack of awareness of money value of time.

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Inadequate controls and ignoring of warning signals. Poor quality awareness.

1.10 Definit ion of Project Management:

Defining what is to be done, maintaining its integrity, and ensuring that, it is done andperformed as desired, within time & cost budgets fixed for it through a modular work approach usingorganization and extra-organizational resources is what project management has to achieve.

Project management is fully bound by time, cost and performance targets. Project management approach can be utilized for scheduled maintenance within the

organization. Benefits of project management approach for scheduled maintenance are

i) The Project Manager (PM) will be totally concerned with completing theprojectised maintenance work within the budget and schedule.

ii) Reduction in total down time of plant.iii) Each agency will be monitored continuously which resolves the problem before

they cause any damage.iv) PM is clear with the idea what to do?v) Decision will be made faster.

1.11 Features of project management:

i) Grouping work into packages.ii) Single responsibility centre PM.iii) Supporting & servicing internally by organization and externally by vendors and contractors.iv) Commitment through negotiations, coordinating and directing towards goals through

schedules, budgets & contracts.v) Ensuring adherence to goals through continuous monitoring & control using schedules,

budgets and contracts as the basis.

1.12 Project Manager (PM):

An ideal PM qualities:i) He should have a good technical background and knowledge of related discipline like

business administration & economics.

ii) Should have excellent managerial & organizational capabilities.iii) Good communication is a plus point for project engineer to achieve great amount of success.iv) He should actively participate at all times keeping the moral of his team high which goes a

long way to complete a difficult and challenging project.

1.12.1 Duties of PM:

i) To prepare overall process design flow-sheet.ii) To estimate overall requirements of utilities, and raw material consumption.iii) To specify process requirement.iv) To select materials and equipments.v) To allot duties to various groups and keep monitoring each activity by use of schedule charts.vi) To hold regular meeting.

***********************

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Chapter 2: Project Initiation

2.1 Proof of ful ly established project:

A project can be considered to have been fully established when the following conditions arefulfilled.

1. The technical configuration of the project has been fully defined.

2. The performance requirement for the various technical systems, sub-systems and the keyequipments has been specified.

3. Cost estimate for the project is frozen.4. Techno-economic viability of the project has been examined, appraised and approved.5. An overall schedule for implementation of the project has been drawn-up.6. Financial arrangements have been made to implement the project.7. A project manager has been appointed for implementation of the project.8. Pre-project activities have been completed and a zero date fixed.

Item no. 1 to 5 are covered in feasibility report. Feasibility report is prepared during definition phase. Project Manager only updates and validates the report.

2.2 Feasib ili ty Report:

It is prepared to present techno-commercial analysis. This is used to give idea about project, to financial institutions and/or customer. According to planning commission feasibility report should include:

1. Raw material survey,2. Demand study,3. Technical study,

Product pattern Process selection Plant size Raw material requirements

4. Location study,5. Project capital cost estimates and source of finance,

6. Profitability and cash flow analysis,7. Cost-benefit analysis.

2.2.1 Raw Material survey:

There are three categories of raw material,i) Available in natural form as deposit, either on the surface or underground, but in same

country.ii) Available as finished product or by-product from some operating plants.iii) Not available in country but to be imported.

Qualitative and quantitative analysis is required. Transportation of raw material has to be considered.

2.2.2 Demand s tudy:This include,i) Demand: It covers,

Uses of the product to be manufactured, The prospective consumer, Present consumption, Expected consumption in future including possible export,

ii) Supply: Covering assessment of Existing capacity, Present level of production, Capacity utilization, Extent of import and projected supply.

iii) Distribution:

Channels of distribution, Mode of transport, Mode of packing and cost of distribution, Govt. policies.

iv) Prices: Domestic and international price trends,

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Control on price as imposed by the govt. Prevailing duties and taxes,

Literature which are generally referred for study:1. Plan documents: Issued by planning commission, provides information on plan proposal and

growth targets those are both physical and fiscal.2. Guidelines to the industries.

Published by the department of industrial development, ministry of industry. It provides information about licensed and installed capacity, present production, importsand exports, indigenous capability regarding know-how, design & fabrication, futurescope, etc.

3. Economy survey: Published by the Ministry of Finance it provides data on industrialproduction, prices, export etc.

4. Annual survey of Industries: Published by the central statistical Organization, it provides dataon production, number of units installed, capacity, etc for several industries.

5. Import and export statistics: Published by the Ministry of Commerce, it provides data onimports and exports of a very large number of items.

6. Monthly bulletin of Reserve Bank of India: Provides information on production cost indices forvarious industrial items.

7. Survey reports of various institutions: Publications of

Industrial Development Bank of India, National Council of Applied Economic Research, Times of India, economic division.

2.2.3 Technical Study:

1] Production pattern:

In case of process plant, the selected process would also determine the various co-productand by-products those are possible.

The total spectrum of product, co-product and by-product represents the product pattern. Quantitative analysis with cost has to be done. Changing technology, govt. policies, import and export governs product pattern.

2] Process selection:

All alternative process has to be tested for techno-economic feasibility. Patented process has to be used through license agreement. If company possessing patent, do not engineer the project, then it may be done through

project engineering company which convert patent into a technology package. A good technology package for a chemical process plant should consist of

i) Basic design data, process description and specifications,ii) Process flow diagram,iii) Equipment list,iv) Process data sheet for all equipments,v) Process piping and Instrumentation diagrams (P & I),vi) Instrumentation data sheet,

vii) Utility summary,viii) Indicative plot plan,ix) Utility P&I,x) Pipeline list process and utility,xi) Operating instructions.

2.2.4 Location study:

Possession of site and removal of uncertainties associated with site has to be completed beforezero date.

Change in plant site makes greater impact on viability of project.Site selection cri teria:i) Availability of land, soil characteristics and cost of land,ii) Approach to site,iii) Source of raw material and transportation requirements,iv) Transportation and marketing of finished product(s),v) Source and availability of water,vi) Availability of power and source,vii) Availability of skilled manpower,

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viii) Social amenities in area,ix) Availability of tax incentives, if any,x) Facility for drainage and effluent disposal,xi) Availability of engineering and maintenance facilities,xii) Acceptance of the project by the local bodies.

1] Availability of land:

The site chosen should be sufficiently large for the present requirement and also for any possiblefuture expansion.

Minimum required area is summation of area for manufacturing unit, utility unit, off-site facilities,arterial roads, car parks and open spaces (e.g. assembly points).

Land should preferably be govt. owned and available for industrial development. It should not involved displacement of population. The land should be reasonably flat so that expensive levelling can be avoided. It should have adequate means of natural or artificial drainage. The site should not get flooded from river water or sea tide. It should also be accessible for transport of materials and personnel. The land should be suitable for heavy construction work and should not come under earthquake

prone zone.

Cost of land should be competitive with other suitable sites.

2] Approach to site:

The site must be approachable by rail/road. This survey can be done using maps.

3] Transportation:

Cost and level of difficulty are major constraints. For bulky raw material and for high raw material to product ratio, a site should be nearer to source

of raw material e.g. cement plant, sugar factory. Also for raw material requires immediate processing, plant is located nearer to source of raw

material e.g. dairy.

Volume and nature of raw material and product decides the mode of transport. But final choice on mode of transport is made base on site location. Transportation of staff also has to be considered.

4] Water:

For process industries water requirement is very high therefore source of water should be near tosite.

Quality and quantity assessment of water has to be done. Assessment should be done for following purposes steam generation, cooling water, floor

washing, fire-fighting and drinking. Surface water (except sea water) is mostly preferred over sub-soil water for process industry.

5] Power:

Power may be the only guiding factor for plant location for some industries like aluminium, ministeel, calcium carbide, etc.

A continuous process requires uninterrupted power supply. Irregular power supply will not only cause heavy losses to production but may also damage plant

machinery and equipments.

6] Manpower:

The industries need is manpower of desired skill. A site should be attractive to skilled workers. If site is at remote place then amenities like housing, transportation, educational institutions, etc

has to be provided to attract skilled workers. Training to local people is also a good solution to get skilled personnel. This increases social

interaction with local bodies. The review of manpower should also take into consideration to labour relation, productivity, etc in

a particular region.

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7] Regional development:

If industries are set-up in notified backward areas, then certain benefits are available by way oflow cost of land, cash subsidy, and development loan and tax relief.

Financial institutions also may help by concessional rates and relaxed norms. Benefits have to be weighed against difficulties in that location. If raw material, power and other inputs are easily available and there is not too much of a problem

in marketing the produce, then locating the project in a backward area may be an attractive

proposition.

8] Effluent disposal:

Effluent may be solid, liquid or gaseous. Site selection do not influenced much by gaseous effluent disposal. But government may induce

stringent laws for particular areas like urban locality. For solid effluent suitable location within a reasonable distance from plants required for disposal. Volume and nature of the effluent influence the location of the dumping space. Liquid effluents need to be treated to make it harmless to discharge in natural waterways. If the cost of treatment is very high then select coastal region for project site.

9] Acceptability by local bodies:

Project must get accepted by local people. Sometimes government declares zones for particular class of project.

2.2.5 Financial arrangement:

Though the entire fund is not required on the zero date, nevertheless, suitable arrangement willhave to be made in advance so that funds do not pose a constraint for meeting the project targetsonce the project starts.

Various types of cost have to be identified.

1] Capital cost:

All cost incurred in the project before it becomes ready to start commercial production will betreated as capital cost.

It includes cost of land, plant and machinery, township, design engineering, licensors fee,management and supervision and even pre-operative expenses.

2] Working capital:

The fund required for maintaining various inventories in the form of raw materials, operatingsupplies, intermediate products, finished products and meeting miscellaneous cash requirementsfor maintenance of a level of production, is treated as working capital.

These inventories have to be maintained as if there is no consumption (i.e. as soon as any itemget consumed, new has to be purchased).

A part of working capital borrowed for inventories before full production is termed as borrowedworking capital. The rest of working capital is termed as margin.

3] Operating cost: Expenses on raw material, labour, utilities, repair and maintenance, selling and others during

commercial production are treated as operating expenses. The part of the operating expenses which can be financed from long term sources as pre-

operative expenses.

Financial st ructure:

Debt are cheaper than equity as interest on debt is tax deductible where as dividends on equityare paid out of net income after taxes.

Debt capital has fixed liabilities. Dividend payment is at the sole discretion of the company. Debt contains risk but equity requires high tax payment.

If dividend paid is less, share holder may dispose their shares. To keep balance between debt and equity, debt-equity ratio has to be maintained. A company with major proportion of debt is said to be high leveraged. A high leveraged company can make larger profit when the demand is pitched high, but at

recession it will also incur high losses.

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There is specific debt-equity ratio for each type of industry, e.g. for cement industry it is 4:1.

2.2.6 Preparation of cost estimate:

Purpose: assessing fund requirement and economic viability. Under-estimate may cause shortage of fund. Whereas over-estimate may fail to attract fund

raisers due to high cost.Types of estimates:

Order of magnitude, Study estimate, Preliminary estimate, Definitive estimate, Detailed estimate.

-60

-40

-20

0

20

40

60

1 2 3 4 5

Stages

%E

rror

Fig.2.1: Accuracy in cost estimates

1] Order of magnitude:

This estimate is made when a project has been identified and the entrepreneur wants to get arough idea of the investment so as to decide whether to pursue the project or not.

Accuracy 60%. Ratio method is used.

i) Investment per annual ton capacity.

If installed cost of plant-1 of annual capacity C1 ton is rupees R1 then installed cost R2 ofplant -2 having capacity C2 can be estimated as,

1 22

1

R CR

C

For same technology cost per annual ton capacity assume to be remained constant. If same type of plant data is not available then final data of plant of same complexity can

be used.

ii) Turnover ratio and Capital ratio.The ratio between annual sales and investment expressed in rupees is known as turn-over ratio. Inverse of (or reciprocal of) turnover ratio is capital ratio(C).

Total investment in RsC=

Annual sales in Rs

Installed cost for plant-2,R2= CV1P1

V1 is projected annual sales volume,P1 is price per unit of sales volume.

iii) Six-tenth factor.This is modification of the investment per annual ton capacity method. Plant investment isassumed to vary as 0.6 power of the plant size.

0.6

22 1

1

CR R

C

iv) Inflation index.

This method is used to estimate cost of same capacity plant. If capacity is different thenthis method can be used with previous discussed methods.

CI (new)Installed cost (new) = Installed cost (past)

CI (past)

Where CI is cost index.

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v) Location index.Knowing a plant cost in one country, the cost of similar plant in other country can beestimated using this index. The index can be developed if data related to productivity ofcountries involved are available.

2] Study estimate:

This estimate is for studying the economic viability of the project and also for arranging funds for

the project. Equipment list is available at this stage. Cost of each equipment, can be obtained from previous data or from vendors. Total cost of equipment is then multiplied by Lang factorto get overall plant cost. Lang factor takes care of civil, electrical, piping, instrumentation, insulation and installation costs. Accuracy is 30%.

3] Preliminary estimate:

The preliminary estimate is prepared when the technology package is frozen and a firmimplementation schedule is available.

That is, this is done on zero date. At this stage budget allocation is frozen.

Accuracy is 20%. Greater accuracy because of available data.

4] Definit ive cost estimate:

This estimate is prepared after the zero date, when the detailed engineering of a project is in anadvanced stage.

Higher accuracy is due to knowledge of real cost of equipments, contract work and other material. Accuracy is 10%.

5] Detailed estimate:

This estimate may be made on completion of engineering, ordering of equipment and machineryand award of major field contracts.

Accuracy is due to information about,i) Ordered value of plant, equipment and machinery.ii) Awarded cost of all major contracts.iii) Final material take-offs.iv) Ninety percent construction drawings are available.

Accuracy is 5%.

2.3 Project Profitability:

The economic viability of project can be assessed by the following methods.1. Pay back Period (PBP)2. Return on investment (ROI)3. Net Present Value (NPV)4. Internal Rate of Return (IRR)5. Benefit Cost Ratio (BCR)

2.3.1 Pay back period:

It is the time required to recover the original investment through incomes from the project.Original investment

PBP = No. of yearsAnnual income

Annual income =Gross income Total operating cost excluding depreciation. If annual income is not uniform then pay back period will be counted as the number of years,

over which, the income accumulated together will equal the original money invested. Advantages:

i) Method is simple and easy to calculate.ii) Good for project financed with high borrowed money where fund recovery is of greatest

concern.iii) Suitable for projects where technology obsolescence is very rapid.

Disadvantage:i) This method does not tell anything about income over investment.ii) Complete life is not considered in this method.

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iii) Project having long working period, even though their return in latter years are very high, mayget rejected.

e.g.Project A B CCapital investment, Rs 1,50,00,000 1,50,00,000 1,50,00,000Project operating life, yr 10 15 20Annual income, Rs 15,00,000 15,00,000 15,00,000 for first 11

yrs and 20,00,000for remaining life.Pay back period, yr 10 10 10

2.3.2 Return on Investment (ROI)

The ratio relates earnings to investment.Avg. annual earnings after tax

ROIAvg. book investment after depreciation

ROI must not only be higher than bank borrowing rate, but also above the minimum acceptableprofitability rate of the company.

No allowance for time value of money (i.e. interest). Not useful for long operating life.

Annual Profitstd. % Return = 100Total initial investment

where,

Total investment = Fixed Capital Working capital

Profit = Gross income Operating Charges Depriciation

2.3.3 Net Present Value (NPV)

Pay-back period and ROI method doesnt consider time value of money. NPV is the difference between the present value of the annual cash flows and the initial required

investment.

1 (1 )

nt

tt

S

NPV Ii

Where,

St= Net cash flow for the year, ti= Interest rate,I=Original Capital investment,n =Operating life

2.3.4 Internal Rate of Return (IRR)

This is also a discounting method. Discount rate at which NPV becomes zero is known as Internal Rate of Return. Project with highest IRR will be considered as the best.

2.3.5 Benefit Cost Ratio (BCR)

Modified form of NPV. Ratio of aggregate present values of all future cash flows to initial capital investment. Higher BCR, the better is the Project. BCR should be higher than unity.

1 (1 )

nt

tt

S

iBCR

I

2.4 Numerical Examples

Ex-1:A heat exchanger has been designed and insulation is being considered for the unit. The

insulation can be obtained in thickness 1, 2, 3, or 4 inches. The following data have been determinedfor different insulation thickness. What thickness of insulation should be used? Value of heat is 30units/Million Btu. An annual return of 15% on fixed capital investment is required for any capital, putinto this type of investment. Then exchanger operates 300 days per year, which costs 0.1 Rs/unit.


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Insulation, in 1 2 3 4Btu saved/ hr 3,00,000 3,50,000 3,70,000 3,80,000Cost of insulation, Rs 12,000 16,000 18,000 18,700Annual fixed charges, % 10 10 10 10

Ans: 2 in th ickness.

Ex-2: A proposed chemical plant will require a fixed capital investment of Rs. 10 million. It isestimated that the working capital will amount to 25% of total investment and annual depreciation10% of fixed capital. If annual profit will be Rs. 3 million, determine the standard percent return ontotal investment and minimum pay out period.Ans: Std. % ROI = 15%, Pay out Period = 4.44 yr

Ex-3:Cash flow pattern for two projects is given below in Rs crores.

Year 0 1 2 3 4Project-A 10 7.2 9.0 11.2 13.4Project-B 10 9.0 9.4 10.2 12.0

We wish to select project giving higher IRR. Which one should we choose?

Ans: Project-B (IRR=0.875)

Ex-4: Find NPV, BCR for the following project with interest rate of 15%

Year 0 1 2 3 4 5Cash flow, Rs 1,10,000 30,000 31,000 36,000 40,000 43,000

Working capital for project is Rs 20,000/-.Ans: NPV = Rs 17,000/- , BCR = 1.1545

2.5 Phases of Technology Transfer (TT):

2.5.1 Selection:

Technology selection has to be done, considering the environment in which the undertaking is setup.

For Indian conditions technology should labour oriented and not highly sophisticated. Use localraw materials, local infrastructure and other locally available inputs to the fullest possible extent.

Obsolete or an unproven technology must not be selected. Also well proven ancient technologyshould not be used either, if recent competitive technology is available.

The choice of technology, comprising license fee and royalty, should be reasonable and itsabsorption in the production cost should not render the product highly priced with no buyers.

Technology may be acquired from any of the following sources:1. Indigenous technology owners like National Laboratories, Research Institutes and

industrial undertakings which have either indianised same technology or developed sametechnology and proved its success.

2. Extension to an existing technology transfer agreement between a foreign collaboratorand another user-undertaking. This arrangement is practicable only among undertakingswhich do not individually compete in the market.

3. A duplicate import of technology owned by different collaborator.4. The import of new technology not tried in India before.

2.5.2 Source searching:

Following are the some of the sources for TT1. The government data bank.2. Scientific and industrial research departments national register of foreign collaborator.3. Industrial and technical directories and journals, advertisements.4. Research papers, professional bodies.5. Trade fairs.

6. Indian investment centre, New Delhi.7. International Trade Association like BASATA (British & South Asian Trade Association).8. Asian Productivity Organization (APO),9. British technology group.

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2.5.3 Negotiation :

After establishing contact with several sources, one must negotiate with them for getting the best atthe least cost, keeping the government guidelines and actual requirements of the project in view.

2.5.4 Contracting:

To avoid any loss to project work, a careful contract agreement has to be prepared. Collaborators often take advantage of the other partys ignorance.

All requirements from TT for the project should be included in contract. While documenting contract agreement consideration towards government guidelines is required

to get clearance (license) from government. One should take full advantage of the collaborators knowledge, experience and skill.

2.6 Forms of TT:

2.6.1 Licensing :

A licensing agreement would give the right to use and transfer a technology either patented or anunpatented, on agreed terms and conditions.

The technology package must be split up into many components with corresponding break downof fee/charges.

The scope of TT must be defined well. Licensors guarantee must be set out specifically with quantities, qualities and values, amount of

liquidated damages, etc. Duration of the license must be stipulated with reference to construction period and production

period. Gradual Indianisation of the technology and sublicensing rights must be clearly stipulated.

2.6.2 Outri ght purchase:

Outright purchase makes it possible to share the technology with others or use it in multiple unitsof same organizations or license out or transfer to other users.

This type of TT is preferable when,1. the technology is unlikely to undergo substantial improvement at the hands of the

collaborator in the future,2. user have the organizational strength to use it without the association of the collaborator,and,

3. user is confident of subjecting the technology to its own R&D and improving it.

2.6.3 Joint venture:

The most common and inexpensive form of TT. Continuous benefit of the collaborators R&D results, experience and skill for all times to come. Collaborators participation in a risk associated with the technology. Collaborators support in foreign market for the end product. Possibility of product improvement without time-consuming bargaining with the collaborator. Even in the in-house R&D efforts, there will be more sincere participation by the collaborator.

2.6.4 Buy-back agreement:

The supply of technology by the collaborator to a new or existing project for production orsubstantial improvement of a product.

The collaborators undertaking to buy a substantial part of the product for some year at amanufacturing cost.

Here the collaborator takes good care of the product quality, and as he is obliged to pay a mfgcost over which he has to make a profit, he strives to ensure cost effectiveness too.

2.6.5 Loan agreement:

Lender refers the particular technology to be used for project. Lender may make technology-owner, a party to the loan agreement or a subsidiary agreement. Lender monitors the effectiveness of the TT to the projects complete success.

2.6.6 Plant operation and management TT:

It is often introduced in a running plant that is subjected to modification or partial renovation.

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The technology owner operates and manages the plant for a specified number of years withguaranteed, larger, and better quality output of the product.

Mostly this form of the contract is given to the original collaborator to take advantage of hisprevious knowledge about the plant, and to benefit from the use of the latest technologicalimprovements with minor modification to the plant and equipments.

2.6.7 Consultancy contract:

The consultant either introduces his own proven technology or brings in another technology underhis management.

Between the technology-owner and the consultant there shall be the valid collaborationagreement ensuring the appropriate support.

User must get copy of that agreement, to be sure of its existence.

2.6.8 Other contracts:

These are for supply and commissioning of equipment and turnkey packages. The support ends with the completion of the contract. Separate fee for commissioning and erection need not be paid.

2.7 Activi ties in technological package:

Once the technology for project is selected, following are the activities to be done for completing thetechnology package.

2.7.1 Compilation of project data:

Design data required for engineering design and technical specification is compiled and verified. The data to be supplied for following areas.

i. General project design requirements,ii. Design codes and standards to be used,iii. Regulatory requirements,iv. Permits and approvals necessary,v. Soil conditions and site conditions, climate conditions,vi. Water analysis,

vii. Input qualities,viii. Electrical system,ix. Effluents and other waste disposals and environment requirements,x. The requirements of utilities and off sites,xi. Auxiliaries and subsystems,xii. Raw material/feedstock and the end product.

2.7.2 Process design:

Process design has to be completed before basic and detailed engineering. It covers,

i. Material and heat balances,ii. Process control system, specification and data sheets,iii. Pressure and flow diagrams,

iv. Equipment load data sheets,v. Process piping and instrumentation diagrams

Where the project is setup with the technology supplied by an outside agency, the process designpackage, including a process recipe, is usually given by the agency.

In most cases, process design is done at the feasibility study stage itself.

2.7.3 Basic engineering:

Basic engineering defines the scope of the project with reference to contents, capacity, quality,etc.

Basic engineering includes following activities,i. Design package,ii. Engineering specifications,

iii. Equipment listing and purchase requisitions,iv. Piping and Instrumentation Diagrams (P&ID) including line and valve sizing.v. Single line electrical diagrams,vi. Site plan and implementation plan.

These factors determine the projects investment cost; therefore owner has to see what the actualrequirements are and what the unwanted features are.

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2.7.4 Detail engineering:

Detailed engineering is the activity that produces the final system design with the necessarysizing and integration, aimed at optimizing all segments and components of the project.

Detailed engineering include following activities.i. The final plot plans and detailed drawings and other documents for manufacture,

fabrication and construction of civil works, piping, electrical and instrumentation.ii. Approved vendor drawings,

iii. Complete specifications,iv. Bill of materials,v. Material takeoff sheets,vi. Purchase requisitions,vii. Delivery schedules.

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Chapter 3: Project Licensing & Patent

3.1 Project Licensing & Clearances

As per central governments Industrial policy statement of 1991, most of the industries areexempted from license. But pollution causing projects needs Industrial License (IL).

Not only setting up new units, but also substantial expansion, take over of an existing plant, takingup the manufacture of a new article in an existing unit or even changing the location of an existingindustrial undertaking in pollution causing industries require license.

Foreign companies can also apply for IL. But maximum 51% foreign equity investment is allowed.

3.1.1 Procedure for Licensing:

1. The License applicability:

The licensing provisions apply to an industrial undertaking set up by any person or authorityincluding the Government.

If the company has to be formed to implement the project the Letter of Intent (LOI) be issued inthe name of the applicant by Secretariat for Industrial Approvals (SIA), otherwise it will be incompanys name.

Original applicant, usually hold at least 10% of the equity of the company.

Administrative ministries issue endorsement and amendments (i.e. LOI).

2. Approval procedure:

The government had announced a streamline system for issue of industrial approvals. Accordingto procedure letters of intent, foreign collaboration approval and capital goods clearances are tobe issued within 30 days of the receipt of applications in each case.

Entrepreneurs can make simultaneous application for IL, foreign collaboration approval andcapital goods clearance.

For composite and simultaneous applications the time target is 90 days.

3. Issue of LOI/ Prima Facie rejection letters:

If an application is approved and further clearances are not involved, an IL is issued to theapplicant. Otherwise LOI is issued.

LOI will include conditions proposed by government for implementation of project. Within six months from issue of LOI, entrepreneur should make an application to the funding

institutions. Administrative ministries can pardon the delay in application for funding. If it is proposed to reject the application, the tentative decision of government to this effect is

communicated indicating the grounds of rejection to the applicant, giving him an opportunity tostate his case within a specified period of time, before a final decision is taken on the application.

Prima Facie rejection orders are given by administrative ministry. Decision can be revised byappropriate approval committee if needed.

The initial validity period of LOI is three years. Extension can be sought from administrativeministry.

Entrepreneur has to file application for all clearances required within validity period of LOI.

4. Industrial License (IL): Once the conditions incorporated in the LOI are fulfilled, it is converted into an IL. The LOI will be

converted into IL by the SIA. The initial validity of IL will be three years within which period the commercial production from the

licensed capacity has to be established. Administrative ministry can extend license period for two more term of one year each, if there is

good and sufficient reason. Extension beyond five years is normally not entertained.

3.1.2 Foreign collaboration Approval:

Foreign collaboration is either done for foreign investment or foreign technology. Import of technology in high priority industries can be approved if the royalty payment does not

exceed five percent of domestic sales and 8% of export. Government declares list of high priority

industries, frequently. For lump-sum payment within ceiling limit for technology transfer, RBI approves up to Rs. 1 crore. Foreign collaboration involving payment in excess of this ceiling amount would require

government approval.

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The application shall seek approval for foreign investment and payment in foreign exchangeunder following cases:

i. Lump-sum payment towards, Technical know-how fees, Design, engineering, consultancy, etc, and Use of patents, brand names and trade marks, etc.

ii. Recurring annual royalty,

As a percent of the ex-factory value of annual production (excluding excise duties),after deducting the all in total landed cost of imported components, and the standardbought out components, if any.

Import of design and drawing is allowed without any restriction.

3.1.3 Approval for appointment of foreign consul tant:

Foreign consultant is allowed to work as sub-consultant to render engineering services through anIndian prime consultant.

Sub-consultancy by foreign consultant is only approved on the following conditions:i. He is responsible for the supply of a patented technology which is the basic know-how for

the proposed Indian project, and for the licensing of its use.ii. His services are necessary for the scrutiny of the detailed engineering done in India, and

that such scrutiny has a bearing on the successful transfer of the technology with

performance guarantees.iii. His services are vital in equipment selection and inspection.iv. His presence is important in quality assurance and observance of standards in construction,

for achieving the performance guaranteed by technology owner.v. His supervision is needed for rectification of any equipment failure.

Agreement with foreign consultant must include, time-bound schedule for achievements of targets/ milestones, performance guarantees, penalty and bonus clauses, training of Indian personnel, design and introduction of related management practices, and information and communication system.

Fees payable to foreign consultant must be a fixed amount, and its payment should be linked withmilestone achievements.

3.1.4 Import of capital goods:

Import of capital goods is allowed unless it is restricted by government. Government issues a list of permitted goods to be imported according to change in policy.

3.1.5 Import policy:

Capital goods enlisted as free import can be imported by project enterprises without license. Otherwise there are three types of items,

1. Prohibited items: these shall not be imported,2. Restricted items (negative list): may be imported only with an import license,3. Canalized items: may be imported through the canalizing agencies like state trade

corporation. Capital goods (CG) required for high priority industries are generally kept outside the negative list. CG clearances have been made automatic when CG imports are covered by foreign equity or

they are 25% of the value of plant and equipments. Second hand CG may be imported in following sectors without a license.

Printing and allied process, Garments/ hosiery/ made-ups, Leather processing/ Leather finishing/ Leather goods manufacturing/ Leather apparel

manufacturing, Rubber and canvas footwear, Sports goods, Electric lamps,

Packaging and packaging material, Forged hand tools, Oil field services, Writing instruments, Sea food, Any other sector specified time to time.

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Second hand CG to be imported shall not be more than seven years old and shall have aminimum residual life of five years.

Some of the CG can be imported on re-export basis without license. (e.g. hot gas balloonimported for Raymonds Chairman Emeritus Dr. Vijaypat Singhania who set the world record of

flying a hot air balloon to a height of 69,852 feet on November 25, 2005). Imported CG or parts may be sent abroad for repairs, and re-imported without license. If the CG imported (new/second hand) is to be used for production of goods for export then

enterprise gets concession on import duty for CG.

3.1.6 Environmental/ Pollution control clearances:

Unless and until an enterprise gets a clearance for pollution control financial institutions will notclear their funding proposal.

This clearance is very critical issue, due to its direct connection with public. Government has identified 20 industries causing high pollution.

1. Primary metallurgical producing industries namely, zinc, lead, copper, aluminium andsteel.

2. Paper and pulp and newsprints.3. Pesticides/ Insecticides.4. Refineries.5. Fertilizers.6. Paints.7. Dyes.8. Leather tanning.9. Rayon.10. Sodium/ Potassium cyanides.11. Basic dyes.12. Foundry.13. Storage batteries.14. Acid/ alkalis.15. Plastics.16. Rubber (synthetic).17. Cement.

18. Asbestos.19. Fermentation industry.20. Electro-plating industry.

In respect of these industries, the following conditions have to be fulfilled. The state director of industries confirmation that the site of project has been approved from

environmental angles by the competent state authority. The entrepreneurs commitment, both to the state government and the central government

that he will install the appropriate equipments and implement the prescribed measures for theprevention and control of pollution.

The state pollution control boards certification that the proposal meets with environmentalrequirements and that the equipments installed or proposed to be installed are adequate andappropriate for the requirements.

The ministry has classified industries into three categories red, orange, and green for the

purpose of inspection and enforcement of pollution control status. The frequency of inspection is high for the red, medium for orange, and low for green. Some of the general environmental considerations to be taken care of in project design.

Incorporate all features generally necessary for the protection of the environment and ofhuman health, both in the main facility and supporting facilities.

Control erosions caused by the removal of trees and vegetation. Minimize the undesirable use of hazardous chemicals, if any. Make provisions for electrostatic precipitator, dust collectors, air cleaners, etc. Minimize the toxicity to marine life. Plan all disposal systems with the minimum risk to the environment.

In short, during the course of your project activities, try seriously not to do anything which willdirectly or indirectly pollute or degrade or damage the land, air, water, and natural resources.

3.1.7 Railway clearance: The secretariat for Industrial Approval (SIA) gets it cleared by the Railway ministrys department. So no separate application is required if owner is applying for IL. Owner enterprise has to fulfil following requirements for this clearance,

1. Allocation and preparation of yard,

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2. Railroad to site,3. Siding, handling, and special facilities including types of wagons required at the dispatching

and receiving stations, for dispatching and receiving raw material and finished goods.4. wagon allotment, and5. Up-gradation of serving railway station, if necessary.

If IL is not necessary, owner has to deal with the Railways in this regard directly.

3.1.8 Electr icit y clearance: Depending on the size of the requirement, clearance should be sought from the state electricity

board or the central electricity authority. Details of connected load (in kW) and maximum load (in kW) should be given for clearance. For own generation station, owner has to give full particulars of the station proposed to install and

also has to show its capital cost separately in project estimate.

3.1.9 Forest clearance:

Every project involving de-reservation of reserved forest or use of forest land needs clearance. This clearance is to be given first by the state government and then the central government Application for environmental and forest clearance should be submitted simultaneously to Ministry

of Environment and Forest.

If only environment clearance is required, the case will be processed only for environmentalclearance. Decision is normally given within six weeks. Application should include following issues

1. J ustification for locating the project in the forest area, giving alternatives that wereexamined and the reasons for their rejection.

2. Species-wise and diameter-class-wise list of trees to be cut down.3. A map showing location of the areas to be deforested, to the scale of 1:50,000.4. A detailed and satisfactory proposal for the rehabilitation of the affected persons. (Non-

forest land must be identified for rehabilitation).5. Monitoring mechanism for implementation of the condition of compensatory afforestation

and other stipulated conditions.

Compensatory afforestation:

Compensatory afforestation is required for de-reservation or diversion of forest land for non-forest use. The following norms are laid down for compensatory afforestation.

1. Where non-forest land is available, compensatory afforestation shall be raised over equivalentarea of non-forest land

2. Where non-forest land is not available, compensatory plantation shall be raised overdegraded forests twice in extent to the area being diverted.

3. Where non-forest land available is less in extent than the forest land being diverted, inaddition to compensatory afforestation on available non-forest land, plantation shall be raisedin degraded forest, twice in extent to the difference between forest land being diverted andavailable non-forest land.

Compensatory afforestation is usually not required for following cases.1. In case of diversion of land in small areas of less than 1 hectare in extent, unless specifically

asked for by the department.In case of transmission line afforestation is not required if diverted area is less than 10 hectare.

3.2 Intellectual property:

Intellectual property is a form of legal entitlement which allows its holder to control the use ofcertain intangible ideas and expressions.

The term intellectual property reflects the idea that once established, such entitlements aregenerally treated by courts, especially in common law jurisdictions, as if they were real property.

The most common forms of intellectual property include patents, copyrights, trademarks, andtrade secrets. In civil law jurisdictions, intellectual property has often been referred to asintellectual rights, traditionally a somewhat broader concept that has included moral rights andother personal protections that cannot be bought or sold.

Intellectual property rights may exist either for an indefinite period of time (in the case oftrademarks and trade secrets), or they may last for a term of years, after which they typicallyexpire and become part of the public domain.

These rights are governed by the law of the sovereign nation in which the intellectual propertywas created or established. Traditionally, each nation established and enforced its ownintellectual property rights; however, beginning with the Paris Convention for the Protection of

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Industrial Property in 1883, numerous treaties have provided for cross-border protections,multinational procedures, and increasing uniformity.

3.2.1 Patent:

A patent is a set of exclusive rights granted by a government to an inventor or applicant for alimited amount of time (normally 20 years from the filing date).

The word's original definition, one theory of patent legislation is to induce the inventor to disclose

knowledge for the advancement of society in exchange for a limited period of exclusivity.Furthermore, as the grant of letters patent only grants the right to exclude others from practicingthe invention and does not affirmatively grant the right to practice the invention, a patent is notconsidered a monopoly right.

3.2.2 Rights granted and rights not granted:

A modern patent provides the right to exclude others from making, using, selling, offering for sale,or importing the patented invention.

Generally, patents are enforced only through private actions; namely, through civil lawsuits orlicensing agreements. Governments typically reserve the right to suspend or cancel a patent atwill.

An application for a patent (other than a design patent) must explain how to practice (i.e., make

and/or use) the invention(s) and must also include "claims" that particularly point out theinvention(s) and will define the protection conferred to the owner of the patent, once granted.Generally, the exclusive rights are limited to the invention(s) defined by the patent's claims.

For example: Patent claims are typically of the form of a long sentence, e.g., "An apparatus forcatching mice comprising, a base member for placement on a flat surface, a spring member...", "Achemical for cleaning windows comprised of 10-15% ammonia, ...", etc.

If an inventor takes an existing patented mouse trap design, modifies it to make an improvedmouse trap, and obtains a patent on the improvement, he/she can legally build his/her improvedmouse trap only with permission from the patent holder of the original mouse trap, assuming theoriginal patent is still in force, and the patent holder of the original license has every right to denythe patent holder of the improvement use of the invention at any price. However, if the originalpatent owner tried to copy the inventor's improvement, he/she could prosecute that original patentowner to exclude him/her from using the improvement without permission.

Continuing the example though, if the inventor's improved mouse trap patent claims a guillotiningmember, but the original manufacturer copies other unclaimed aspects of the improvement, theinventor might not be able to exclude the manufacturer from using those other improvements.

For this reason, it is important, that the patentee eventually obtain patent claims that include theabsolute minimal set of limitations that differentiate a new invention over what came before.Dependent claims can be used to describe additional variations and features.

3.2.3 Governing laws

At this time, there are a number of significant international treaties governing patent law. Themost universal of these is the WTO Trade-Related Aspects of Intellectual Property Rights(TRIPS) Agreement, to which almost all countries are a party.

There are two types of awarding the patent, "first to invent" and "first to file". In first to invent, thesecond one to file has the burden of proof and usually loses such contests.

Patent grants are territorial in nature. Thus, patent protection in multiple countries requiresseparate filings of patent applications in each country, or region, where protection is sought.Within Europe, a single patent application procedure is available through the European PatentOffice, but successful applications result in multiple patents (up to 36) rather than a singleEuropean-wide patent.

Many of the international treaties are designed to afford some recognition of filing dates to patentapplications filed in one country.

Typically, inventors are allowed one year from the date of their filing in their home country to filethe application abroad, frequently called national stage filing. Systems such as the PatentCooperation Treaty(or PCT) allow inventors a cost effective way to further delay national stagefilings.

3.2.4 Examination process and procedure The application is reviewed by a patent examiner for patentability. Some countries do not formally review patent applications while others accept the judgment of

other patent examining authorities.

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A typical examining procedure is: Filing a patent application by inventor or applicant. Formalizing of application (signatures by inventors or applicant), often filed at the same time as

the application. Publication at 18 months from earliest claimed filing date. Review by the examiner or the Examining Division, including back and forth "negotiation" with

applicant to narrow/modify the claim language.

Grant of the patent (if it the patentability criteria are met) and publication of the issued patent. Opposition period, during which anybody (e.g. other companies) can challenge the patent grant.The specifics of the review process include:1. Verifying that claims are for a patentable subject matter.2. Unity of invention, since each patent application can only be for one invention (called

"restriction" practice in the United States).3. Formalities. Is the claim grammatically correct, properly drawn, and unambiguous?4. Utility or industrial applicability.5. Novelty (newness)6. Non-obviousness or inventive step.

Different patent systems use different terms and different standards for these concepts, ofwhich the most important probably are: patentable subject matter, novelty, non-obviousness andsufficient disclosure.

3.2.5 Term of patent

As TRIPS agreement declares, the term of an issued patent is twenty years from earliest claimedfiling date.

Also, in several countries there are multiple types of patents, and the twenty year term frequentlyonly applies to so-called utility patents and not design, petit, or other kinds of less heavilyexamined patents.

3.2.6 Example

If the better mousetrap patent is filed on J anuary 1, 1996 and is issued or granted on J anuary 1,2000, it will lapse twenty years from filing: J anuary 1, 2016. However, if the inventor comes upwith a second improvement and claims priority to her first patent when filing the second patent on

J anuary 1, 1998, that second patent, after grant, would lapse twenty years from the earliestclaimed priority: J anuary 1, 2016.

3.2.7 Miscellaneous

While a patent grants an exclusive right on the invention claimed, many national laws provide forspecial rules on granting compulsory license to requesting third parties when the invention is notput into to practice within a specified amount of time or is put into practice in a manner that isdeemed to be insufficient for the needs of the Country.

Secrecy provisions are also present in many national laws in case the invention for which a patentis filed is deemed to have military interest.

A patent might also be seized by the State under grounds of public utility. For example, during theanthrax scare that followed the September 11 attacks, it was rumoured that the US wasconsidering seizing from the Bayer Corporation the patent on the Cipro-antibiotic. However, theanthrax attacks did not continue and eventually the patent was not seized.

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Chapter 4: Project Organisations & Planning

4.1 Project organisations:

4.1.1 Project Manager as a Staff Assistant to the Chief Executive:

Fig.4.1 Project manager as a staff assistant to the chief executive

Depending on position of PM, he can produce results. In this type of arrangement PM virtually has no authority. He serves as a staff assistant to the chief executive. PM does not make any decision for project, nor does he provide any staff service to the functional

departments who make all decisions relating to the project. PM collect information and communicate with chief executive. This arrangement may be chosen by chief executive who wants to directly control the project but

cannot devote much time to keep track of details.

This arrangement may work for very small projects, but for large project it cannot work.

4.1.2 Consultant as a Project Manager:

Consultant advice the chief executive. He has no authority to implement the activities. He doesnt take decisions but can influence the decisions of the chief executive and functional

executives. His task is same as previous one. Gains in this method

o Recommendation which should be authentic, reliable and impartial.o Improved effectiveness.

As he is not a staff of the organization, he can make recommendations freely to chief executive,

but informal communication with project staff as he doesnt have authority.

4.1.3 Project Manager as a specialized staff funct ion:

PM provides specialized staff service to other department. The PM in this role provides schedules, budgets, and information to the various functional

departments who will execute the project. PM should be specialist in project management tools and techniques. He should have good knowledge of scheduling, budgeting and information systems. Activities of PM

i) Collection and transmission of data.ii) Follow-up of one functional group to service another,iii) Maintain records,iv) Measure progress,v) Analyze progress, andvi) Prepare progress report.

PM remains focal point for communication between various agencies.

Chief executive

Personnel Technical Finance

Project Manager

Commercial

Engineering Construction ContractAdministrator Purchase

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Fig. 4.2: Project manager as a specialised staff function

PM doesnt take decision but only give service to functions. He doesnt direct how to implement schedule. He only advice the functional groups. The functional management would expect PM to take all the responsibilities without any authority. PM may throw-up his hands if anything goes wrong as he doesnt have sufficient authorities.

4.1.4 Matrix organization:

Fig. 4.3: Matrix organisation

When arrangement of sharing authority between a PM and other functional managers isformalised, we have an organization form which is known as matrix organization.

Two superiors to specialized team are available one belonging to the project and the other tothe specialized function.

Here both managers are responsible for successful completion of project. Both have authority over the working force. There may cause confusion due to dual reporting system. For this there should be clarity of roles.

Functionalmanager

Projectmanager

FunctionalmanagerA

FunctionalmanagerB

FunctionalmanagerC

Project manager 1 A1 B1 C1Project manager 2 A2 B2 C2Project manager 3 A3 B3 C3

ChiefExecutive

Project ManagementDivision

EngineeringDivision

CommercialDivision

Civil Mechanical

Project managerX Project

Project managerY Project

ContractorCompany

CivilcontractorStaff

X Project

StaffY Project

Contractual authority relatioLine authority relationship

nship

ChiefExecutive

Project ManagementDivision

EngineeringDivision

CommercialDivision

Civil Mechanical Electrical

Projectmanager

Projectmanager

Flow of projectauthority

Flow of functional authority

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A mutually supportive relationship should exist between the partners in matrix setup for thesuccessful execution of a project.

In contractual situation also mutually supportive role has to be played for smooth execution. Both parties should not try to overtake each other. If both the parties work on mutual understanding then the matrix is called Balanced matrix . If the project influence is more in decision making for the project, then the arrangement is called

Strong matrix , otherwise Weak matrix .

4.1.5 Task Force Organization:

Fig. 4.4: Task force organisation

Advantages:

Project management dominating which receive attention over time and cost constraints. Project moves very fast.Disadvantages and limitations: One cannot be too sure about the quality objective. For complex technology and for large project this may become ineffective. Due to shortage of specialists sometimes creation of task force is difficult.

4.1.6 Totally Projectised Organization:

Fig. 4.5: Totally projectised organisation

PM has total authority even regarding policies and procedures. Function specialists have to report only to PM and they dont have their separate department.

It works like mini company. Function specialists have authority to take decision for their respective area of work. PM has to carry out lot of administrative work with a core project work. This arrangement is used when the project is too large and complex or it is located far away.

ChiefExecutive

Project Engineering Procurement

Central Engineering

Indirect authority relationshipLine authorit relationshi

Construction

Task forceEngg

Task forceprocurement

Task forceconstruction

CentralProcurement

CentralConstruction

Chief Executive

Project Engineering Finance Commercial

Engineering Finance Commercial Personal

Personal

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4.2 Team Bui lding:

The real source of uncertainty is behaviour of people working in project. If the people are concerned more about their rights, which a contract aims to protect, and not

about their responsibility then the project is not likely to show the best result. If the people working in project could able to keep their self-interest aside and put project interest

high then they can able to work together smoothly. This is called as Team. Any amount of contractual clauses cannot make a team and consequently, can not avoid all sorts

of uncertainties those may arise due to the same.

4.2.1 Seven Cs for Team Build ing:

Whenever there is more than one brain working together there is always a chance of conflict. So to build a good team there is seven aspects which are to be followed by each team member.

1. Conceiving: Conceive or understand the inter-relationship model, which will becomeoperative for the realization of the project objective.

2. Concurring: The second step is to make the members concur or agree on this or ask them toaccept this.

3. Committing: Only when members it would be possible to obtain commitments from them.4. Communicating: Communication of the requirements of the interrelationship model must be

done.

5. Coordinating: A total coordination must exist so that any shortfall in commitment, anywherein the line doesnt upset the team balance.6. Counselling: The defaulting member must be counselled to exercise more self control so

that he makes an all-out effort to meet his commitment.7. Controlling: When self-discipline doesnt work and the smooth and harmonious working is

being affected, control must be exercised to bring the working in line with the requirements. So team building should be based on cooperation and not competition.

4.2.2 Teams Success:

Following are the factors, which are to be considered for success of team.1. Training the Team Members:

The team members must be given a short-term training. This will make them aware of

the objective of project, the environment and culture in which they are required to function, the time-cost relationship, the system and techniques to be followed, social responsibility, etc.

Every member of the team should become a self-propelling person with a clear direction.

2. Personal qualities of Team Member:

Team members should have positive attitude, good conceptual abilities, good communications skill and language ability, dependable character, knowledge of the enterprise and its philosophy, good knowledge of work.

3. Specialist committees and daily meetings:

Specialist committees must form to work on special areas, where it may consume more time ifgiven to other members.

Proper communication between members and specialist committees is required to resolveproblems quickly.

Meetings should be structured, to avoid waste of time by bad organizers and incompetentpresidents.

4. Functional interface:

A continuous interface has to be there, between different functional departments, as well asbetween project team and other agencies for project success.

5. Specific responsibi lity of the teams: Team leaders, group leaders and individual members, everyone has to take their responsibility

according to the work assigned to them.

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While delivering responsibility, appropriate resources have to be assigned to the member.

6. Team Members authority: For achieving the desired good results, the team member representing the various functions and

agencies should have sufficient authority to commit their departments or organizations onspecified matters.

7. Team Members accountability: In the same manner as every functional department and the project team as a whole have theirspecific accountability to the top management, every member of the team also should have anindividual accountability apart from the team responsibility.

This accountability is as important as individual commitment. In team and committees there can be a tendency for some members to remain passive without

assuming any real responsibility or doing any hard work.

4.3 Work Breakdown Structure (WBS):

WBS is a technique which breakdown a work into its components and at the same timeestablishes the connections between the components o

Documents

IPC Jan 2009