MODULE 2 RURALINVEST MODULE 2 · 2017-11-28 · Module 2: Identifying and preparing project profiles Module 2 draws upon earlier participatory needs identification work described

Further information on RuralInvestor other FAO Investment Centreproducts and services can beobtained from:

DirectorInvestment Centre DivisionFood and Agriculture Organizationof the United NationsViale delle Terme di Caracalla00153 Rome, Italy

Tel: (+39) 06 57054477Fax: (+39) 06 57054657

E-mail: [email protected] site: www.fao.org/tc/tciFAO Web site: www.fao.org

MODULE 2RURALINVEST

In recent years, locally designed and managed investment projectshave assumed increasing importance as effective tools forsustainable rural development. Supporting local communities toconceive and implement their own projects – whether for incomegenerating activities or for social investments – not only ensuresgreater ownership and commitment to those projects, but alsostrengthens the capacity of communities to contribute to andmanage their own development. However, the increasing adoptionof this approach by national governments, international financingagencies and rural banks has also highlighted the critical importanceof providing adequate support and guidance to national techniciansworking with communities and other groups in identifyinginvestment needs, defining potential projects, and developing themfor external financing.

RuralInvest answers this need by offering a series of modules,developed over a number of years and tested extensively in the field,which provide such support through a range of materials andtraining courses, and include technical manuals, custom developedsoftware and instructors’ guides. Modules currently in use or underdevelopment include:

Module 1: Participatory Identification of Local Investment Needs

Module 2: Preparing and Using Project Profiles

Module 3: Detailed Project Formulation and Analysis

Module 4: Monitoring and Evaluation of RuralInvest Projects

An associated training course "Assessing Demand for RuralInvestments" is also available to assist technicians to evaluatemarket and non-market demand for project outputs.

Module 2: Identifying and preparing project profiles

Module 2 draws upon earlier participatory needs identification workdescribed in Module 1 to guide users in the creation and use ofspecific project profiles. Designed to be created together with thecommunities and individuals seeking project financing, the profileshelp applicants to turn general investment ideas into concreteproject proposals, as well as to understand the key elements of aproject. Using simplified formats for defining project investments,operating costs and, where relevant, income, the profiles allow afirst assessment of feasibility and provide the basis for thesubsequent preparation of detailed project proposals.

RuralInvest Mod.2 EN 07.qxd 21-11-2007 13:31 Page 42

R U R A L I N V E S T

PREPARING AND USINGPROJECT PROFILES

A participatory approach to identifying andpreparing small scale rural investments

MODULE 2

RuralInvest Mod.2 EN 07.qxd 21-11-2007 13:31 Page i

TC/D/A1420E/1/11.07/500

MODULE 2R U R A L I N V E S T



Rome, ItalyOctober 2007

Investment Centre DivisionFood and Agriculture Organization

of the United Nations

RuralInvest Mod.2 EN 07.qxd 17-01-2008 12:04 Page iii

The designations employed and the presentation of material in this informationproduct do not imply the expression of any opinion whatsoever on the part of theFood and Agriculture Organization of the United Nations concerning the legal ordevelopment status of any country, territory, city or area or of its authorities, orconcerning the delimitation of its frontiers or boundaries.

All rights reserved. Reproduction and dissemination of material in this informationproduct for educational or other non-commercial purposes are authorized withoutany prior written permission from the copyright holders provided the source is fullyacknowledged. Reproduction of material in this information product for resale orother commercial purposes is prohibited without written permission of the copyrightholders. Applications for such permission should be addressed to the Director,Investment Centre Division, FAO, Viale delle Terme di Caracalla, 00153 Rome, Italyor by e-mail to [email protected]

© FAO 2007

RuralInvest Mod.2 EN 07.qxd 17-01-2008 12:04 Page iv

I. INTRODUCTION TO RURALINVEST 2A. The Purpose of RuralInvest 2B. The Special Nature of Rural Investments 3C. Type and Scale of Projects Appropriate for RuralInvest 3D. The RuralInvest Modules 4E. RuralInvest Users 6

II. THE ROLE AND APPLICATION OF INVESTMENT PROJECT PROFILES 10A. Introduction 10B. Defining a Project 10C. Principle Stages in the Preparation and Use of Project Profiles 11

III. THE PROJECT PROFILE 14A. What is a Project Profile? 14B. What is the Purpose of the Profile? 14C. What is the Difference between a Profile and a Detailed Project Design? 14D. The Principal Elements of a Project Profile 15

IV. KEY ASPECTS TO CONSIDER IN PREPARING A PROJECT PROFILE 18A. Introduction 18B. The Importance of Demand 18C. Supply as an Influencing Factor 19D. Describing Project Operations 19E. Categorizing Costs 20F. Environmental Sustainability 21

V. COMPLETING AND INTERPRETING THE PROFILE 24A. Introduction 24B. Background Information 24C. The Investment 24D. Operating Costs and Income per Activity 25E. General and Maintenance Costs 26F. Preliminary Estimate of Viability (income generating projects only) 27G. Preliminary Beneficiary Estimates (non income generating projects only) 28

VI. NEXT STEPS 32

ANNEX 1: Project Profile Formats 34

TABLE OF CONTENTS

RuralInvest Mod.2 EN 07.qxd 17-01-2008 12:04 Page v

RuralInvest Mod.2 EN 07.qxd 17-01-2008 12:05 Page vii

Chapter I

INTRODUCTION TO RURALINVEST


2

INTRODUCTION TORURALINVEST*

The following document forms part of a “toolkit”comprising manuals, training materials and

computer software, that together provide a basisfor a relatively simple, yet reliable, approach to theidentification, formulation, implementation andevaluation of small-scale community or familyinvestment projects in rural areas.

RuralInvest was originally developed by staff of theInvestment Centre of the United Nations Food andAgriculture Organization (FAO) in response torequests for a readily usable approach to theidentification and preparation of investments muchsmaller than those traditionally considered inpublished guidelines1.

FAO, in cooperation with the multi-agency“Regional Unit for Technical Assistance” (RUTA) inCentral America, translated these initial experiencesinto a general methodology and toolkit, whichhave now been tested in a number of countrieswith considerable success. As the number of usershas grown, it has been possible to improve andexpand the different elements of the RuralInvesttoolkit, as well as offer the package in a number ofother languages.

A. The Purpose of RuralInvest

In recent decades many governments have begunto encourage local communities to assume a moreactive role in decisions concerning their owndevelopment. Often referred to as CommunityDriven Development (CDD), this has included suchmeasures as the transfer of financial resources tomunicipalities, the decentralization of publicagencies, and the creation of local investmentfunds (sometimes known as Demand-Driven RuralInvestment Funds or DRIFs). Using theseapproaches governments and internationalfinancial agencies have created new possibilities forpeople to effectively participate in, and influence,the decisions that contribute to the socio-economicdevelopment of their community, municipality ordistrict.

Selection of investments at local level is not withoutits problems, however. It is not always easy todetermine which investments will yield the bestresults. It may be that a bridge would have greaterimpact on a community than a new well, or that a

dairy processing plant would make a greatercontribution than an irrigation system, but how todecide between them? Furthermore, not allinvestments are sustainable. An investment thatinitially generates strongly positive results for thecommunity may turn out to be simply tooexpensive to keep running (e.g. a local hospital), orto result in the destruction of natural resources thatcannot readily be replaced (e.g. a sawmill).

Over the course of many years, most developingcountries have built up a national capacity toformulate and analyse investment proposals,utilizing a small cadre of internationally trained stafflocated in those ministries and agencies responsiblefor economic and social planning. Usinginternational formulation and appraisal procedures,and often supported by specialists consultants frominternational financing agencies, these highlytrained staff have traditionally focused on preparingkey multi-million dollar investments. The feasibilitystudy for a new hydroelectric dam, for example,could take years and involve a multi-volume reportcosting millions of dollars.

However, these staff typically have little experiencein the analysis of smaller scale projects, where suchin-depth analysis is clearly not justified.Furthermore, even if these experts adapted theirprocedures to the study of small projects, therewould simply be too few experts to support thedozens of decentralized projects, the scores ofautonomous municipalities, or the hundreds ofcommunity groups that are now seeking to identifyand formulate their own projects. What is needed isa different approach; one that that can be used toformulate and approve small-scale projects usingonly local technicians and resources.

In general, three possible procedures can be usedto select and approve projects prepared at locallevel. These are:

1. Applying standard procedures and exclusionsto all projects

The first option is for the funding agency toestablish standard procedures and exclusions, andaccept all projects that meet these criteria. Thesemight include:

c Requiring the signature (or mark) of a majorityof the community or group applying

c Requiring the approval of the local Mayor orCouncil

c Excluding certain kinds of investments (forexample, no projects that might damage the

I

* This document was prepared by Aidan Gulliver, Dino Francescutti and Katia Medeiros of the Investment Centre, FAO,Rome, with contributions from many other FAO and RUTA staff members.

1. “Guidelines for the Design of Agricultural Investment Projects”, Technical Paper No. 7, Investment Centre, FAO, Rome,1992. This is a good example of a methods and procedural manual, designed for the preparation and evaluation of large-scale projects.


3

environment or religious structures will beallowed);

c Excluding projects with investment costswhich exceed a per capita limit (that is thecost per beneficiary).

This option offers the communities or applicantgroups a high degree of autonomy in choosingtheir investments, but the absence of anyevaluation mechanism creates a high risk offinancing projects that are either infeasible orunsustainable.

2. Using predefined investment models for eachexpected type of project

In this second option, a detailed study is carried outfor a number of “model investments”, eachrepresentative of the type of proposal that areexpected to be received from participating groups,communities or municipalities. All proposals mustthen use these models as the basis for theirsubmissions. This method has the advantage ofensuring generally well-designed projects (becauseexperts can be called in to design each model)–especially for infrastructure projects that can bereplicated from one place to another (e.g. a healthclinic).

However, predefined projects do not easily allow forchanges to the basic designs and thus risk fundinginvestments unsuited to local conditions (e.g. anirrigation system). They also tend to limit thedegree of local involvement and ownership, asdesigns are pulled “off-the-shelf”, with little role forthe local community. The need to follow standarddesigns and ensure identical construction alsotends to favour the use of professional contractorsrather than local labour, limiting local involvementeven further. Finally, the use of model investmentsgenerally excludes the possibility of innovativeprojects for which no models exist. They are thusinappropriate when financing a wide variety of ruralinvestments.

3. Local-level project identification, design andanalysis

The design and evaluation of projects at local leveloffers significant advantages, including: (a) thedesign of projects that arise from, and respond to,local needs, priorities and circumstances; (b) thedevelopment of a local capacity not only toformulate and evaluate investment projects, butalso to manage their own development process in awider sense; and (c) the creation of a realcommitment to, and ownership of, the proposalson the part of the applicants, as a result of theirparticipation in the formulation process.

However, this approach undoubtedly requires agreater level of effort and cost than the others, both

in the initial training of local technicians and in theirsubsequent work with applicants. In most caseslocal technicians will also need to be supported bysubject-matter specialists (e.g. irrigation engineers,architects etc.) and be adequately supervised, toensure the quality and correctness of the designsdeveloped. A number of attempts to use thisapproach in the past have proven to beunsuccessful, largely due to the inability of localstaff to effectively master the complex investmentformulation tools developed for use in multi-milliondollar projects.

To avoid these problems, the project design andevaluation process must be brought within thereach of local technicians and the communitiesthey serve. RuralInvest provides the tools to achievethis objective, using a number of separate butinterlinked modules which simplify the tasks ofpriority setting, project identification, detailedproject design and analysis, and finally monitoringand evaluation of the implementation process.

B. The Special Nature of RuralInvestments

The seasonal nature of many rural activities.Unlike urban investments, many rural projects musttake into account the availability of resources (land,labour, capital) in different months of the year andrelate them to differing production patterns (e.g.crop and livestock activities). In addition, fixed costsmay exist which are spread throughout the year,including during periods when no productiveactivity is underway.

The heavy dependence on the use of naturalresources. When evaluating possible ruralinvestments, environmental and natural resourcesustainability are often critical factors for long-termsuccess.

The dispersion of human and economicactivities. Rural populations tend to be spread out,limiting access to infrastructure (roads, electricity)and services (schools, health clinics). Equally, inputsupplies, markets and other productive elementsare also dispersed. This means that greaterattention needs to be paid to such aspects asavailability of inputs and the cost of delivering thefinished product to the buyer.

C. Type and Scale of ProjectsAppropriate for RuralInvest

RuralInvest distinguishes between two broad typesof investment projects: those designed to generateincome, that is, for profit, and projects whoseprincipal purpose is not profit related.


4

The category of income-generating projectscovers a wide range of possible activities:agricultural production, aquaculture, rural shops,irrigation, agroindustry, handicrafts, tourism,transport, the fabrication of simple machinery andspare parts, and marketing services. A project may,in fact, require investment in more than one ofthese areas, and will frequently involve more thanone type of productive activity from the sameinvestment (e.g. production of different crops as aresult of investment in irrigation)

The category of non-income generating projectsalso includes a broad range of activities and can bedivided into three distinct sub-groups:

c Production support: Including access roads andbridges, electrification and communications, aswell as primary irrigation infrastructure;

c Social projects: Health and education services,provision of drinking water and sewagedisposal, and support for communityorganization;

c Environmental projects: Watershed and slopeprotection, reforestation and soil conservation.

It is important to note that projects in the non-income generating category may often include auser fee or charge designed to recover someportion of the operating costs. However, unlike the“for-profit” projects, this income never provides thejustification for the project, but merely contributesto its sustainability.

Although the participatory methodology stressedthroughout the RuralInvest approach renders itparticularly appropriate for use with groups andcommunities, there is no reason at all whyindividuals or families cannot use it. However, suchpersonal applications generally omit the detailedneeds identification and priority setting that iscentral to the first RuralInvest module, andcommence directly with the project profile.

RuralInvest is best used for small and medium scaleprojects that run from perhaps US$5,000 tosomewhere not greatly exceeding US$250,000,always depending greatly on the complexity of theproject design. Micro-investments (very simpleprojects with an investment below US$5,000) oftenmay not require further preparation beyond thisstage, as financing can be decided on the basis ofthe 4-page profile.

Conversely, above a level in the region ofUS$250,000 – depending upon the complexity ofthe project as much as upon the value of theinvestment – it may be wiser to supplement, oreven replace, the use of RuralInvest with aspecialized project formulation team. This isimportant because RuralInvest is designed to beused largely by general technical staff, while above

a certain investment cost it becomes more effectiveto contract specialists in a number of fields.

D. The RuralInvest Modules

As mentioned above, RuralInvest covers a series ofphases or modules. The following is a description ofthe principal elements of each of them.

Module I – Assessing Local Investment Needsand Priorities

The first module of RuralInvest is primarilycommunity focused, particularly through itssupport for the creation of a local developmentplan from which the specific investment projectswill derive. Communities and groups which alreadyhave undertaken this type of process, or individualapplicants who are generally much clearer on theirpriorities, may wish to pass directly to Module 2where the project profiles are developed.

RuralInvest provides detailed guidelines in thisphase to help in the following tasks:

c Define the current situation of the group orcommunity, taking into account a range ofaspects, including physical (the location of thecommunity, availability of land and water,types of soils, slopes, etc.) environmental(forests, fishery, rainfall distribution), andsocio-economic and cultural (availability ofmarkets, current earnings of members of thecommunity, migration, group solidarity, etc.);

c Use this definition of the current situation toreach agreement on key problems andpotentials faced by the community or group;

c Develop a local development plan that definespriorities for action according to the needs ofthe applicants;

c Identify one or more possible broadinvestments that would contribute to carryingout and achieving this plan.

For communities, this first phase almost alwaysrequires the support of a community worker orrural technician, trained in the use of RuralInvestand with experience in participatory planning. Thetechnician will support and guide the applicants inusing the tools and guidelines provided byRuralInvest. Ideally, she or he will already know thecommunity, through residence or previous work inthe area, but in many cases technicians will beassigned to work with the applicants by thesupporting agency as the result of a specific requestfrom the community.

Where there has been no prior contact between thetechnician and the applicants, and a local


5

development plan or its equivalent has never beenprepared, the diagnosis and identification phasemay require the technician to make a series of visitsover a period of as long as three to four months,depending on the degree of organization of thegroup, the complexity of the constraints andopportunities faced, and the accessibility of thecommunity.

Where the community has previous experience inidentifying local requirements and priorities, theprocess will be much more rapid, and the phasecan often be completed after no more than a fewvisits.

In this first phase there is generally no need forspecialized technical staff to participate, as thepriorities and resulting development plan shouldlargely be the work of the applicants themselves.

Module 2 – Identifying and Preparing ProjectProfiles

The core of Module 2 is the preparation of a projectprofile for each priority investment proposal. Theseprofiles provide enough information about theinvestment to allow both the applicant(s) and theeventual financing source to see which ideas havepotential, and are thus worth the further effort andresources required to develop them in detail.

Most individual applicants will seek to by-pass theearlier community diagnosis and planningactivities, which are often of little relevance forthose who already have a clear idea of whatinvestment they seek to make. Even wholecommunities which have previously undertakensome form of community development planningmay wish to pass directly to profile preparation, aslong as there is already a broad communityagreement on development needs and priorities.

Few, if any applicants, however, should bepermitted to jump directly to Module 3 ofRuralInvest, as the resources required for detailedproject development can not easily be justifiedunless a profile has already been approved. Inaddition, the profiles also provide considerableinformation that can be incorporated directly intothe Module 3 models, so little work is lost in firstpreparing the profiles.

Unlike Module 1, the local field technician mayneed to be supported during profile preparation bya subject-matter specialist. Where the proposedproject involves an area for which little localknowledge exists (e.g. solar electricity generationfor lighting), a specialist will be required who canprovide key parameters concerning cost andperformance, so as to avoid extensive work on aproposal that is clearly technically infeasible fromthe start.

Module 3 – Detailed Project Formulation andAnalysis

The third phase of RuralInvest consists of preparinga more detailed project proposal, using the Module2 profile as the starting point. Participants in thisphase may include not only the applicants and thelocal technician (community promoter,extensionist, etc.), but also a support technician,trained in the use of the computerized RuralInvestmodels for project formulation and analysis. It ispossible that the local technician assumes thisfunction. Generally speaking however, the tworoles are sufficiently different that a separation ofresponsibilities is required.

In the detailed project preparation stage additionalexternal technical input may also be required,depending on the investment value and itscomplexity. External input may be needed fromspecialists in such areas as: environmental impactanalysis; irrigation engineering; food processing,etc. Generally, however, their input is short,requiring no more than a few days to a week, in linewith the value of the investment proposed.

The depth and level of detail required in the processof formulation and evaluation will depend on thecomplexity and the scope of the project. Thesupport technician will provide support to theapplicants and to the local technician in some or allof the following tasks:

c Determination of demand and benefits;

c Evaluation of the proposal’s technical feasibilityand scale;

c Assessment of the project’s operationalsustainability, both in financial and inenvironmental terms;

c Determination of the detailed costs of theinvestment and its subsequent operation;

c Selection and specification of an appropriatemanagement and administrative structure;

c Estimation of sources and costs of financing;

The process of formulation and evaluation requiresthe use of a computer and is not generally carriedout in the field. For this reason it is essential thatcontact be maintained between the responsibletechnician and the applicant(s) to insure that theproposal truly reflects their needs. Furthermore, itmay be that the detailed formulation revealsaspects of the investment that require theapplicants to reconsider their plans (for example,competition for labour at key periods of the year, orhigh maintenance costs).

Depending on the degree of complexity of theproject, it is estimated that the detailed evaluationwill require between three and six weeks per profile


6

and will call for several visits to the field by thetechnician working with the computer software.

Module 4 – Monitoring and Evaluation ofRuralInvest Proposals and Projects

Many institutions or internationally financedprojects adopting RuralInvest support thepreparation and financing of scores, or evenhundreds, of rural investments. Furthermore, theprocess of identifying and preparing theseinvestments is often undertaken in a number oflocal offices spread throughout the area covered. Inthese circumstances, adequately monitoring andevaluating the proposals received can be a difficulttask.

As a result, a fourth module has been developedto provide organizations using RuralInvest withassistance in monitoring and evaluating allinvestment projects prepared using the system. Tomeet the monitoring requirements, a searchengine capability has been built into theRuralInvest software. The search engine canrapidly identify and provide key data on allprojects entered into the computer. In addition, allprojects are now ‘tagged’ in order to track theirprogress through the project cycle and permit acomparison of initial proposals with later resultsfor evaluation purposes. Each of these functions isdescribed briefly below:

Monitoring Data on Project Characteristics.Using a number of key indicators defined in everydetailed project proposal (for example type ofinvestment, location, total investment,employment generation, type of beneficiary) it ispossible to use the built-in search engine functionin the software to identify all projects stored inthat computer which meet selected criteria. Thesecriteria can define the location or status of theproject, its type, beneficiary or environmentalcategory or the technician who prepared it. Keyfinancial indicators can also be selected for, suchas internal rate of return, net present value, totalinvestment cost or the use of donated resources.For example, by selecting the indicators ‘northernfield office’, ‘beneficiary group women’ and ‘smalllivestock’, a table would be generated thatshowed all projects meeting these criteria andtheir key characteristics.

Evaluating Data on Project Performance.Proposals and subsequent projects prepared usingRuralInvest can also be labelled according to one ofthe following stages in the project cycle:

c Proposal

c Approved

c Investment

c Implementation

The indicators described above can then be used toclassify projects at different stages in the projectcycle. Furthermore, by entering new data intoprojects as they move from one project stage to thenext, it is possible to evaluate the projects incomparison with earlier stages. For example,entering data on such elements as actual yields,prices or quantities sold once the project isunderway allows returns, employment generationand other measures of project performance to bere-calculated automatically, and hence easilycompared with original projections.

E. RuralInvest Users

RuralInvest is potentially useful for any group,organization or individual that wishes to elaboratean investment proposal that adequately takes intoconsideration all of the key elements in theidentification, formulation and evaluation of aproject. However, taking full advantage of thedifferent tools offered by RuralInvest requires: (a)training in the RuralInvest methodology and tools,and; (b) access to investment and working capitalin order to finance the selected projects. Experiencehas shown that RuralInvest is thus most applicablein contexts such as:

c An agricultural or rural development fundmanaged by a regional development project, aMinistry of Agriculture, or even an NGO;

c A Demand-driven Rural Investment Fund(DRIF) or Community Development Fund(CDF), as promoted by the World Bank andother international agencies;

c An environmental and biodiversity protectionprogram or one aimed at the reducing theimpact of natural disasters, such as aresupported by the Global Environment facility(GEF) and other agencies.

c As a loan analysis and evaluation tool for useby private and parastatal banks with extensiveoperations in the rural sector.

c In the ex-post evaluation by Governments andinternational agencies of the impact andprofitability of rural investments once theyhave been implemented.

With respect to training, although it is notnecessary that the assisting local technicians beexperts in financial matters or economic analysis,there are certain minimum requirements for the keypositions of local technician and of supporttechnician:


7

Local technician or community worker

c Experience as organizer or facilitator of ruralcommunities or groups of producers.

c A basic understanding of the concept of aproject.

c The ability to communicate with ruralindividuals or groups.

c Experience in one or more of agriculturalproduction, rural infrastructure and smallenterprises.

Support technician

c Professional qualification, such as: agronomist,economist, administrator, engineer or othersimilar profession.

c Basic knowledge of rural production systems(agriculture, animal husbandry, agroindustry,etc.).

c Prior experience in the use of computers andMS Windows.

c Familiarity with the basic financial concepts(costs, income, interest rates, inflation, etc.).

c Participation in the first training course forfield technicians.



Chapter II

THE ROLE AND APPLICATION OFINVESTMENT PROJECT PROFILES


entire community. A village dairy plant might beseen by the local farmers, for example, as a way tosell surplus milk, while the women of the villagemay see it primarily as a source of employment. Yetagain, the village development committee mightsee it as a source of profits, which can be used tofinance other activities in the community. Theseaims are not necessarily incompatible, but acommunity which is not clear from the outset as tothe key issue to be tackled by the investment islikely to face severe problems later on: the farmerswill complain that the high prices for dairy productsset by the village development committee (toincrease profits) is reducing demand for their milk,while the committee may blame instead the highcosts caused by having too many staff on thepayroll (to create employment in the village).

Except in the case of very small, or simple,investments, the project profiles produced in thismodule are not the end of the investment analysis.In fact, it is important to realise that, forinvestments of any size or complexity, the fact thatthe profile yields a positive result provides noguarantee that the eventual investment will beworth undertaking. This is because the profile is asimple ‘back-of-the envelope’ approach, designedto be easily understandable by rural villagers andfarmers, and to provide a warning for those ideasthat are clearly not realistic and need to be re-thought. However, the profile ignores, or leavesaside, many complications that need to be takeninto account before a decision is made to committens of thousands of dollars to an idea.

It is for this reason that – in most cases at least – anattractive investment or project profile will be takenforward to the stage of detailed project preparationand analysis. This process is the theme of Module 3.In Module 3 such factors as changes in the projectover time, the impact of financing costs, the needfor working capital, and a greater definition ofdemand, management and environmental issues,are all given attention.

B. Defining a Project

Many people are not clear as to what an investmentproject really is, and this often becomes apparentwhen moving from the needs identification andprioritisation stage of Module 1, to the projectprofile identification and assessment in this Module.As a result of such confusion, ideas will often bepresented which are not really projects andconsiderable time can be wasted attempting toprepare profiles on the basis of these ideas. It isuseful, therefore, for the field technician to sit withthe group at the beginning of the profile stage andensure that they understand what an investmentproject is, and what it is not.

II THE ROLE ANDAPPLICATION OFINVESTMENT PROJECTPROFILES

A. Introduction

This manual provides a detailed description ofthe methodology and procedures involved in

preparing, and then assessing, project profiles forlocally developed rural investments, using aparticipatory approach. Such project profilescomprise the first step in defining and assessingrural investments that not only respond to the realpriorities and needs of the applicants, but which arealso well prepared, contain all relevant information,and are readily understandable by those who willbe asked to finance the investment.

A prior RuralInvest Module (Module 1) providesguidance on the initial process of collectivelyidentifying the opportunities and obstacles facing arural community or group and, through thisprocess, creating a local development plan thatselects and prioritises areas in which specificinvestments are expected to contribute toeconomic and social growth. Originally Modules 1and 2 were combined, but experience has shownthat many communities or groups seeking socialand economic development funds have alreadyparticipated in community or group-level processessimilar to those outlined in Module 1, and thus areable to pass directly to the development andassessment of specific rural investment profiles.Furthermore, RuralInvest is also increasingly beingused by individuals or families who are seekingfinancing for personal investments, that, by theirvery nature, do not require the participatoryidentification and prioritisation process dealt within the first module.

However, it should be stressed strongly that aninvestment can only be as good as the purpose towhich it is applied, and even an apparentlysuccessful investment will be a poor use ofresources if it does not resolve a key constraint, oraddress a key opportunity, facing a family, group orcommunity. The participatory process of identifyingand prioritising key needs and constraintsembodied in Module 1 and other approaches, isthus of real value, and should not be ‘skipped over’or ignored because of a desire to get somethingdone rapidly, or simply because it seems too muchwork.

Many projects fail simply because - from the outset– the goal and purpose of the investment is neverclearly defined, and this is particularly true wherethe project represents the interests of a group or

10


11

In broad terms an investment project can bedefined as follows:

“The expenditure of resources in the present, inorder to generate benefits in the future”

The key elements of this definition are thatresources (whether these be in the form of money,land, labour or other assets) are used in this yearbut that the benefits come in future years. Ifbenefits are generated in the same year but not inthe future (e.g. fertilizer to be applied to a currentcrop), this is not an investment project, but ratherthe purchase of inputs for current operations. Mostinvestment projects generate a stream of benefits;that is to say, a single investment now will result inbenefits being produced each year for a number ofyears into the future. It is also important toremember that the future benefits do not have tobe directly in cash earned, and may not even be ina form that is easy to define. The benefits frombuilding an access road to a village can besubstantial, but they are often difficult to defineclearly, and may include such elements as: (i) betteraccess for local people to social services in thenearest town; (ii) easier and cheaper delivery ofinputs to the community; (iii) easier shipment ofproducts from the community to external markets;(iv) establishment of new businesses in thecommunity and; (v) reduced outmigration ofyoung people who no longer feel so isolated, andwho now have improved employmentopportunities at home.

Not all results of an investment may be positive. Inthe example given above, the access road may alsoresult in faster deforestation around the communityand increased erosion on slopes crossed by theroad. For this reason, the design of a project mayneed to include measures to reduce these negativeeffects.

Under the definition given above, expenditures oneducation and training can be classified as aninvestment project, as they involve dedicatingresources now (to train a person), and producesbenefits in the future (as the person applies his orher training). While this is theoretically correct,many financing agencies are reluctant to fund localinvestment projects that are completely based oneducation and training. In part this is because it isdifficult, if not impossible, to ensure that the personstays in the position of activity for which he or shewas trained. If they leave, the benefits of theirtraining go to their new employer or activitysomewhere else, possibly in another country.Secondly, it is much easier to monitor and controlinvestment activity when physical objects areinvolved. If the project is to build a greenhouse forflower production, for example, it is relatively easyto check that the greenhouse has in fact been built.That is not to say that training cannot comprise apart of an investment project – in fact it is often an

important element of many projects. However, insuch a case training costs are just one element in alarger investment.

C. Principle Stages in the Preparationand Use of Project Profiles

There are three principal stages in the preparationand use of investment profiles: (a) the identificationof possible investment projects; (b) the definitionand preparation of project profiles for thoseinvestments, and; (c) the use of those profiles toundertake a preliminary assessment of the projectproposed. Each of these is discussed briefly below.

Identification of Possible Rural InvestmentProjects

Although a local development plan or similar toolshould clearly identify the areas of priority for thegroup or community, it will often not definespecific projects that will achieve this end, and evenless frequently will it detail the investments that willmake those projects a reality. As a result, it willgenerally be necessary for the communitydevelopment officer, extensionist or other fieldtechnician working with the community to call oneor more participatory sessions to identify thespecific interventions that would best respond tothe needs identified by the community in their localplanning process.

This may well require helping the members of thegroup to understand the nature of a project and itsunderlying investment, as well as keeping thegroup realistic about what can and can not beachieved; for example, if the community is remote,with no vehicular access road or other governmentservices, it is unlikely that a hospital is a seriousoption (although a community clinic may well be).

It is recommended that the community or groupidentifies an initial list of perhaps 3-5 possibleprojects, as not all will likely prove to be feasible –even at this initial stage – and some proposals mayre rejected by the financing agency as not meetingone or more requirements for eligibility. Forexample, a scheme to provide potable water mayappear feasible and be accorded a high priority bythe group, but may require an investment perbeneficiary that is beyond the maximum amountpreviously established by the funding source.

Such a case illustrates the importance of makingclear to the participants at an early stage of theprofile selection stage any restrictions that mayexist as to the nature, use and extent of financingavailable. Some funds are reimbursable, and arethus restricted to investments that will generate anincome stream to repay the loan. Many financingsources require a contribution from the group or


12

community, but the level of this contribution mayvary according to project type. Again, few fundswill finance activities that are environmentallyharmful, but the definition of harmful may also varysubstantially from agency to agency.

Definition and Preparation of Project Profiles

The heart of Module 2 is the preparation of theproject profiles. It is critical that this takes placewithin the community or area where the applicantslive, and that preparation is not moved for the sakeof convenience to the offices of the technicalagency, where only a handful of villagers (at best)will attend, and even then may well feel intimidatedby the unfamiliar surroundings. No elaborateequipment is necessary for this work; although flipcharts or blackboards are useful, they can easily besubstituted for by large sheets of paper attached tothe wall of the schoolroom, meeting hall or privatehouse, using sticky tape or tacks. When usingpaper, thick markers are necessary, as most of thegroup will have trouble seeing names and numberswritten with a normal pen.

In the early stages of using RuralInvest, manydoubted that rural people, often largely illiterate,could really contribute to, and understand, aproject proposal and analysis. Our experience hasclearly shown that this is not true. While not allparticipants may be able to read the individualitems written on the board – a sewing machine, forexample, or an irrigation pump – they will certainlyunderstand the numbers put against them. We willreturn to this topic again when we discuss theassessment phase of the Module.

It is important that, where possible, the members ofthe group do their own investigations as to costsand prices related to the idea they are puttingforward, and do so before the session at which theproject profile is prepared. If a group believes thata community-run river transport company wouldcontribute significantly towards resolving keyconstraints within the area, then they had betterhave some understanding of how much launches,outboard motors and fuel will cost. Of course this isnot always possible; when project profiles wereprepared in indigenous communities in Ecuador,there was much interest in providing electricity forlighting and the pumping of water using solarpanels, but it would be too much to expect thatthese communities would have expertise in thisarea – outside experts had to be consulted toprovide basic information on the cost, durabilityand capacity of such panels. Even so, there weremany other costs associated with the schemes,such as stringing public lights along the main

thoroughfare, the water pump and the watertower, that certainly were within their ability todefine and cost.

Where the project proposal is not overly complex,and the group has done its homework beforehand,it is usually possible to prepare a project profilewithin a couple of hours – sometimes less. Thecomplete group of 3-5 projects can often be dealtwith in a single day, particularly if the communityhas previously selected different individuals orgroups to find the required information on eachproposal. On the other hand, if the key elements ofthe project have still not been agreed upon, andthe group is ill prepared, a long and exhausting daymay not be enough to properly prepare and assessa single project profile.

Undertaking the Preliminary Assessment

A number of basic indicators are used to provide apreliminary assessment of the project profile, andthese are described and discussed in Section 5.6.Together, these measures provide a very rough andready guide to the viability of the eventual project.Except in the case of very small or simple projects,they can not tell us whether or not a project is likelyto be successful; too many details still unsettled,and too many factors left aside, for that to bepossible. However, they do provide an indication asto whether it is worth dedicating the time andresources necessary to move from the profile to thefull project stage.

Given the simplifications employed, if a projectappears infeasible at the profile stage, it is unlikelyto prove worthwhile later on. Thus projects that failthe simple tests applied at this level should berethought, and either abandoned or restructured torespond to the apparent weaknesses.

The specific indicators used to assess a projectprofile vary according to whether the project isincome generating or not; i.e. whether the projectis justified on the basis of its profitability, or on itssocial, environmental or other non-monetaryimpact. For projects targeting profitability, costsmust be less than income, and the net income mustbe enough to repay the initial investment within areasonable period of time, as well as to fund theeventual replacement of the machinery andequipment employed. For non-income generatingprojects, the aim is to keep investment andoperating costs per beneficiary within acceptablelevels, and to identify sources of labour and moneythat will be needed later on for operating andmaintaining the investment (school, road, etc.).


Chapter III

THE PROJECT PROFILE


14

relied on outsiders telling them what should bedone, such confidence building is a valuablecontribution to the social capital of thecommunity.

d) Together with the other stages in theRuralInvest approach, it contributes to a moresuccessful implementation process. Experiencehas show that projects developed throughRuralInvest, and which have had participatoryproject profile development exercises, presentfewer problems during the subsequentimplementation process. In part this seems tooccur because the applicants understand moreclearly the objectives and operation of theproject. Other factors may include theirincreased confidence and ownership in theproject, and the relationship developed withthe local technicians.

C. What is the Difference between aProfile and a Detailed ProjectDesign?

Although a profile is normally the first step towardsthe development of a detailed project design, thereare important differences between the two. Theprofile is a simplified view of the eventual projectthat makes important compromises in order toreduce the complexity of the analysis and render itunderstandable by rural populations with noprevious experience in project design or analysis.Such compromises are not, in themselves, bad, butthey can be dangerous if the person leading theparticipatory sessions at group or community levelforgets that they exist, and encourages theparticipants to think that the profile is the project.The following are key characteristics of a projectprofile.

A Profile is a ‘Snapshot’ of the Project: A properproject analysis considers the changes to theproject over time. A small plant processing fruits forjams and other preserves may process increasedvolumes as the years go by, may increase itsefficiency of processing (thus reducing costs), ormay start to process other fruits harvested atdifferent times of the year, thus staying open moremonths of the year. The profile, however, takes thesimple approach and looks at the results from anaverage year over the project life.

A Profile Simplifies the Replacement ofEquipment and Machinery: In the real world,machinery and equipment are replaced when it istoo expensive to keep them functioning. Theproject will face costs in the year they are replaced.For the project profile, with its ‘snapshot’ view ofthe world, this is not possible. The profile,therefore, sets aside funds in the ‘average’ yearselected to contribute to the eventual cost of

III THE PROJECT PROFILE

A. What is a Project Profile?

Aproject profile is a simplified description of aneventual project. In addition to defining the

purpose and ownership of the project, it presents afirst estimate of the activities involved and the totalinvestment that will be required, as well as theannual operating costs and, in the case of incomegenerating projects, the annual income.

It is simplified in a number of senses; costs may stillnot be well defined, minor items may be excluded,and assumptions as to the demand for the outputof the investment, whether it be a childcare facility,a bridge, or canned vegetables, are probably justthat – assumptions.

B. What is the Purpose of the Profile?

The project profile serves a number of importantpurposes. These are discussed briefly below.

a) It helps to ensure that the members of thecommunity or group involved understand theprobable implications of their proposal in termsof investment and operating costs, labourrequirements, scale of operations and otherfactors. It is often not until the proposed projectis debated publicly and written down in front ofeveryone that these elements really emerge. Upto this point, group members may just have feltthat it would be ‘good’ to have a new accessroad to the vil lage, without reallyunderstanding what that might entail – bothfor the village as a whole and for thempersonally.

b) It helps eliminate wasted effort in preparingdetailed projects that are incoherent, lackingsupport among the applicants, or which fail tomeet basic tests of viability. If human andfinancial resources to support projectformulation are limited – which is usually thecase – this aspect of the profile in acting as a‘filter’ is very important. If the community canonly receive funds to support one full projectpreparation per year, it is best not to wastethose resources on a project that has no chanceof success.

c) The participation of group members in thepreparation and assessment of the profile is animportant stage in the ownership process forthe specific project, as well as increasing theconfidence of the participants in their ability toidentify and develop real solutions to theirproblems (or responses to opportunities). Forcommunities and groups, which have always


15

replacing the machine. While not completelyaccurate, this does at least provide some allowancefor this essential step.

A Profile Includes no Financing Costs: A keysimplification made in preparing a profile forincome generating projects is to completely ignorethe cost of financing as the estimation of such costsrequires quite complicated calculations (non-income generating projects will not normally havefinancing costs, as they use grant funds, rather thanloans). In the detailed project analysis financingcosts are considered – not only for the investmentitself, but also for working capital needed to coverinitial operating expenses. Financing costs can besignificant and their absence at this stage meansthat the profile will tend to look more attractivethan it would do if these costs were included, andthis should be borne in mind.

A Profile Uses Broad Estimations for Costs andIncome: In preparing a detailed project it isexpected that the applicants will make everyreasonable effort to obtain accurate information asto costs and income (including yields and prices). Aworkshop might be broken down into improvingaccess for vehicles, the concrete base, the majorstructure (per square meter), the water and powersupply, and the equipment to go inside. This is notnecessary or even desirable when preparing theprofile. It is sufficient at this stage to estimate ingeneral terms that the approximate cost of theworkshop will be $12,500.

A Profile Excludes Associated Costs: Projectstypically involve a number of associated costs thatare largely ignored at the level of the profile. Thesecan include such items as: technical training ofstaff; establishment of systems (for example book-keeping); fees for sanitary certificates or companyregistration; design of packaging and labels, and;payments to architects, surveyors or engineers whowill oversee works needed for the project. Althougheach one of these costs may not in itself be verylarge, together they can add significantly to start-up costs for the new enterprise. However, theyrequire considerable work to estimate accuratelyand are normally ignored in preparing the profile.

A Profile Pays Limited Attention to ProjectOrganization and Impact: In order to ensure thatan investment results in a successful project, it iscritical to consider carefully how the eventualproject will be managed and operated, and whatsort of impact it might have on the social, culturaland environmental setting it is placed in.Determining these factors may often involveconsiderable discussions among the group, and inthe case of environmental impact, may evennecessitate bringing in a specialist evaluator. Again,it is not necessary to provide all the answers at theprofile stage. However, it is important that theapplicants have given some thought to these

factors, otherwise arguments may severely damagethe groups unity and commitment later in thepreparation process.

D. The Principal Elements of a ProjectProfile

The project profile, as prepared with the applicants,consists of five parts. The last part has twovariations: one exclusively for income generatingprojects (5a); and the other for non incomegenerating projects (5b). With the exception of Part1 (the Introduction) it is not essential that thecomponents be completed in the same order aspresented. Many groups prefer to define theinvestment before tackling general costs or income,but this is not required. An example layout for thecomponents is presented in Annex 1 to thismanual, and can be used as a guide when drawingout the tables on a blackboard or large sheet ofpaper.

Part 1: Background Information: This sectionprovides general information about theapplicants, the location of the project andits characteristics, as well as a brief summaryof the objectives and justification for theinvestment, including the demandanticipated for the product or serviceresulting from the project when operating.The purpose of Part 1 is to allow anyone notfamiliar with the project to understand –preferably in no more than 1 page – thebackground to the proposal. Agreementshould be obtained from the applicants asto the general purpose and characteristicsof the eventual project as well as whowould likely be involved in its operation andmanagement.

Part 2: Investment. In this section the applicantsare asked to list the various elements thatwill have to be obtained (purchased orsupplied by the group) for the investmentto be realized. For each item (except land –see Section 4 of this manual) it is alsonecessary to estimate the average workinglife of the item and who is to provide it(loan, donation, contribution of thecommunity). A simple calculation is thenmade to determine the average annual costof each item.

Part 3: Operating Costs and Income per Activity:This section describes income and costsdirectly resulting from carrying out activitiesmade possible by the project, and whichchange according to the scale of activity(i.e. the greater the activity, the greater thecosts and income). If the project is a simpleone, there may only be a single activity, for


16

example the grinding of grain (in the caseof a local mill). However, in other casesthere could be several activities; forexample a dairy plant may produce cheese,butter and yoghurt. The section is primarilyof relevance to income-generating projects,although there are some circumstanceswhere it may prove useful to list operatingcosts and even income for other types ofprojects as well (e.g. where there is a usercharge for a health clinic). To adequatelycomplete this section, it is necessary for thegroup to understand the concepts ofproduction units, sales units and productioncycles, which are discussed further inSection 4 of this manual.

Part 4: Total Income and Costs: After estimatingoperating costs and income per activity,results are aggregated to obtain totalfigures. Aggregated operating costs of thevarious activities foreseen are generally thelarger portion of total costs. The otherportion of total cots comprises General andMaintenance Costs. These refer to coststhat do not change with variations in thescale of production, but arise from theproject in general. They may include suchexpenses as: hiring a manager, nurse, orother employee; operating a vehicle; localland or property taxes; or office expenses.They will also include the costs ofmaintaining (but not replacing) equipmentand other goods purchased or built at theinvestment stage - for example maintainingan access road, or repairing fences used toprotect a reforested area.

Part 5a: Preliminary Estimate of Viability (incomegenerating projects only). This section isused to briefly describe demand/marketsituation and to perform simple calculationsrequired to make the preliminary estimate ofproject viability. The key calculations are:

c Annual Net Income: To determine ifprojected income is higher than directand general costs

c Annual Net Income less AnnualInvestment Costs: To determine ifannual net income (above) is sufficientto also cover replacement of theinvestment as it reaches the end of itsuseful life

c Number of Years of Net Income Neededto Cover the Investment: To determine ifthe annual net income is high enough topay back the investment cost within areasonable period of time.

Part 5b:Preliminary Beneficiary Estimates (nonincome generating projects). This sectionrelates the overall cost of establishing andrunning the project to the number ofbeneficiaries and also considers howoperating costs will be paid for. Keycalculations are:

c Investment Cost per Beneficiary: Thetotal expected investment cost dividedby the number of direct beneficiaries(users and suppliers) and indirectbeneficiaries (all those potentiallyaffected by the project).

c Annual Operating Cost per Beneficiary:The total annual operating cost(including maintenance and repairs)divided by the number of direct andindirect beneficiaries.

The preliminary identification of future sources offunds for project operation and upkeep is also avery important part of profile preparation for non-income generating projects. Obtaining investmentfunds is often much easier than finding resources tocover annual costs once the project is underway.Any part of this cost not assured from outsidesources will have to be met by the users of theproject and/or the surrounding community.


Chapter IV

KEY ASPECTS TO CONSIDER INPREPARING A PROJECT PROFILE


18

IV KEY ASPECTS TOCONSIDER INPREPARING A PROJECTPROFILE

A. Introduction

Despite its simplified nature, there are a numberof key factors (or parameters) that must be

understood and considered by the applicants ifthey are to adequately complete the project profile.These include: (a) the level and nature of thedemand for the eventual project; (b) the relevanceof supply constraints (where applicable); (c) thedefinition of project operations, such as the units ofproduction and the production cycle; and (d) thetypes of costs involved. Each of these is examined inmore detail below.

B. The Importance of Demand

The correct estimation of demand is critical for anytype of project. No project is worth undertaking ifit does not respond to a demand – either from themarket (in the case of projects generating productsor services for sale) or from potential users (for nonincome generating projects).

As a result, the estimation of existing or potentialdemand must comprise the first step in assessingthe viability of an investment. A knowledge of thelevel of demand likely to be met by the project notonly determines its overall feasibility, it will also playan important role in deciding the location of theproject (e.g. a health clinic, transport service, orshop), the scale of the investment, and the natureof the item or service to be offered.

While it is not necessary at the profile stage to enterinto a detailed analysis of demand, no profile shouldever be prepared, or accepted, which does notexplain the basic assumptions as to who would bethe purchasers or users of the output of the project,and what their pattern of use would be. These keyaspects are explored in more detail below:

1. Income Generating Projects

For income generating projects the two key factorsare the quantity that can be sold (i.e. that will bepurchased), and the price that the buyer will pay.For some products, such as grains, constructionblocks or cooking oil, demand is rarely a limitingfactor; the market is large and the sort of projectssupported by RuralInvest are unlikely to meet morethan a small fraction of total consumption.Furthermore, as the products are not readily

perishable, they can be made available year round,and prices tend to change only gradually, reflectingvariations in raw material and storage costs. Thusdetermining volumes and prices for these productsis a matter of project output, and predominantmarket price (less transport costs to the market).

Perishable products, however, are a different story.Here available volumes, and therefore prices, canvary enormously, as the product is expensive if notimpossible to keep for another day. Fresh vegetablesmay be very abundant and cheap in the winter, forexample, when rainfall is adequate and temperaturesmoderate, but may be very scarce and expensive inthe summer when irrigation and even shade nettingmay be required. For perishable products, therefore,it is critical to consider the seasonality of productionfor the proposed project, and relate that seasonalityto the prices likely to be encountered.

Specialized products (including many processedfoods, clothing and services) are the most difficultcategories for which to determine market demandand prices. Prices are not standard for all goods orservices of one type, but vary according toingredients, quality, and the perceptions of thebuyer. Prices may be estimated on the basis of theclosest comparable product, although if no distinctand obvious difference exists which will attract thebuyer, a significant price reduction may benecessary at the beginning to persuade purchasersto shift from the existing alternatives to the newproduct or service offered by the project. Salesvolumes can be equally hard to estimate, especiallyif the product or service is new, or is entering a verylimited market. In such cases, investment plansshould not be over ambitious, and the minimumscale of production that is compatible with costconsiderations is recommended, at least for start-up. Where services are concerned, it must beremembered that a service not sold during aparticular time period (e.g. the use of a tractor forland preparation) is lost forever, so variations indemand according to season are critical.

2. Non Income Generating Projects

Although it may be difficult to estimate demand fora marketed product, where there is no market at all,estimating demand can be even harder. What willbe the demand for an investment in watershedprotection, or for a new primary school? Thestarting point in the absence of markets must be toidentify who are the expected beneficiaries, bothdirect and indirect. Normally one thinks ofbeneficiaries in terms of families, so for every schoolchild or patient at a medical clinic, there is a familywhich benefits.

Perhaps the best way to try and identify potentialdirect beneficiaries is to ask: “What are peopledoing in the absence of this product or service?Would they change over to become users (i.e.


19

beneficiaries) of the new project?”. Another keyquestion is: “How many new users might becreated if the project goes ahead?”. Perhaps only afew children in the area currently go to school, asthe only existing facility is some kilometres away inthe nearest town. But how many might be temptedif the school was now within walking distance? Itshould not be forgotten that suppliers and workersare also direct beneficiaries, and should be includedin the estimation.

An erosion control project might have few directbeneficiaries (e.g. farmers and householdersdirectly affected by the erosion), but a considerablenumber of indirect beneficiaries (e.g. all those usingthe river or streams that would be protected). Infact, indirect beneficiaries often include the entirepopulation of the area served by the project,whether it be a bridge, potable water, or a day carefacility, so this number is often quite large incomparison with the number of direct beneficiaries.

C. Supply as an Influencing Factor

Although not as universally important as demand,supply can also have a considerable bearing on theviability of a project, particularly one producingoutputs for the market. If operations will requireinputs of raw materials (for example, milk for adairy processing plant), or considerable quantitiesof labour, it is important to consider the availabilityof that supply. Where are dairy farmers selling theirmilk now? What will be the incentive for them tosell instead to the new plant? Do the men andwomen of the community have the free time towork in the project?

As in the case of the sale of outputs from a project,input availability may also change by season. Willlabour be scarce at certain times of the year asworkers disappear to harvest their fields, or migrateto work on larger farms in the lowlands? Will milkproduction decline in the dryer and hotter summermonths? A processing plant for fruits and vegetablesmay be able to operate only a few months per year,as insufficient supply may be available for theremaining months to keep the factory in operation.

D. Describing Project Operations

In order to prepare a project profile, a few keyterms used to define the parameters orcharacteristics of the project must be learned. Thefour most important terms are described below:

1. Project Beneficiaries

Project beneficiaries are those who will derive somebenefit from the implementation of the project.

Two types of beneficiaries can be defined: directand indirect.

Direct Beneficiaries: Direct beneficiaries can bedefined as those who will participate directly in theproject, and thus benefit from its existence. Thus allpersons who will be employed by the project,supply it with raw materials or other goods andservices, or who will use in some way the output ofthe project can be categorised as directbeneficiaries. The patients expected to attend ahealth clinic, or the children expected to attend alocal school (and their families) would be classifiedas direct beneficiaries. So would the nurse orteacher who works in the clinic or school. Directbeneficiaries of an access road might include thoseexpected to pass along the road (drivers andpassengers), as well as farmers and other sendinggoods on trucks along the road.

Indirect Beneficiaries: Indirect beneficiaries areoften, but not always, all those living within thezone of influence of the project. Thus, although ahealth clinic might expect to treat only 1,500patients, indirect beneficiaries may well include allthose within 5km., 8 km. or even 10km. of theclinic (depending on how easy access is to thecommunity where the clinic is situated), as they willbenefit not only from the better health of thosetreated (who will come from their communities),but also might well be patients at some point in thefuture. The indirect beneficiaries of an access roadmight include all those in the communities reachedby the road, as well as those living within a fewkilometres on each side of the road.

It is often only possible to make broad estimates ofindirect beneficiaries for two reasons: (a) there is noclear line separating those influenced by a projectfrom those beyond this zone, as the boundary willdepend on the person and the degree of need orimportance of the project output. One personmight be willing to travel 15km. to reach a healthclinic, while another may not go beyond 8km; (b)for many categories of project, there may be noclear distinction between a beneficiary and a non-beneficiary. Someone who lives 5km. below aproject that is protecting a watershed might beseen as definitely a beneficiary, but someone wholives 50km. downstream may not be. But where isthe boundary of influence? 10km.? 20km? If aproject protects biological diversity in a naturalforest area, who are the indirect beneficiaries?These questions are not always easy to answer, butat least we can be aware that such uncertaintyexists.

2. The Units of Production

The unit of production defines the way in whichproduction costs are expressed. For example, if aperson tells you that a rice crop requires 100 kg. offertilizer, your first question might be: 100 kg. for


20

what area? What you are asking for is the unit ofproduction. For field crops the unit of production isusually the hectare, or whatever other measure ofsurface area might be used locally. Thus we may betalking of 100 kg. of fertilizer per hectare. Thenumbers inserted in the profile for coststherefore depend upon the unit of productionchosen.

While crops are usually straightforward in their unitsof production, other activities may not be so simple.For example, a project to produce poultry mightmeasure costs per bird, per 100 birds, or per poultryshed (containing, perhaps, several thousand birds).A transport project might define costs per truck, orper ton kilometre. When we talk about units ofproduction in a processing plant or workshop, theunit of production could be the entire plant orworkshop, but this can have disadvantages. If lateron you wish to expand (or decrease) the size ofoperations, you must recalculate all over again. Abetter way is often to define the unit of productionas being the same as the sales unit (e.g. a kilo ofcheese, or a shirt).

The important thing to remember is that oncedefined, the unit of production should be used asthe basis for all cost calculations.

3. The Production Cycle

While the unit of production defines how wemeasure costs and income, the production cycledefines the period over which we measure them.For many crops this is not difficult – it is the periodfrom preparing the soil for planting until thefinal harvest. For maize, for example, there mightbe one production cycle per year lasting fourmonths. For tomato, there might be twoproduction cycles per year, each lasting 3 months.This means that the fertilizer used as an exampleabove is applied to rice per hectare and perproduction cycle. If rice is grown twice a year, thenthe 100 kg./ha would be applied to each crop.

No production cycle in RuralInvest can be morethan 12 months. For permanent crops, therefore,such as fruit trees, palms and coffee, which produceover a period of many years, as well as for livestocksuch as dairy cattle, the production cycle is usuallybest defined as 12 months, as costs are incurredcontinuously. With a twelve month productioncycle, there can only be a single cycle per year.However, some continual production activities (forexample a metal fabricator, or a clothing workshop)are best suited to the use of shorter productioncycles, as their costs and income are mostcommonly expressed on a weekly or monthly basis(staff salaries, electricity, payment to suppliers,etc.). Thus you might have 12 cycles of one montheach, or 52 cycles of one week.

For a hotel, the production cycle may be as short asone day, with up to 365 cycles per year (less if thehotel is shut down for a period every year). For apoultry operation, there may be 4 cycles of 12weeks, with a four week break every year to permitan annual cleanup and disinfection2.

As for units of production, there is no absolutecorrect answer to how to define the productioncycle; often several choices are possible. However itis best to choose the easiest alternative, and youmust remember that the duration of the cycletimes the number of cycles must add up to thetotal production period per year: an agroindustrialplant may have 7 one month cycles per year, for theremaining 5 months it is not in operation.

4. Sales Units

Sales units are simply the unit used in pricing theoutput. Thus they can be in kilos, passenger seats,hotel rooms (or beds), pairs of shoes, or cases of 12jars. What is critical is that they relate to the unit ofproduction defined earlier. Thus for rice, the salesunit may be tons, but they must be tons perhectare, if that is the production unit defined. Adairy herd might have litres of milk as its sales units,but these would be litres of milk per productionunit (often per cow). Sometimes the two units willbe the same - a juice plant may define both theproduction and sales unit as a 20 kg. drum of juice.Thus costs and income must both estimated foreach 20 kg. drum.

E. Categorizing Costs

There are three principal types of costs to beconsidered in preparing a project profile:

c Investment costs

c Production or Operating costs

c General costs or Overheads

Although detailed investigation of costs is notrequired - or even recommended - at the profilestage, it is important that an effort be made toassign all known costs as accurately as possible toeach of these above categories. Where this is notdone, the profile may not properly reflect the coststructure of the proposal, causing errors that mayresult in an apparently viable project beingrejected, or a poor project being approved forfurther detailed analysis.

1. Investment Costs

The investment constitutes the heart of any project.An investment is a cost which once paid, will last for

2 For those who are curious, the cost of the annual cleanup would probably be best treated not as a production cost butas an overhead. This difference is discussed in the following sections.


21

a number of years. Some investments will last manyyears – for example a well – while others, such as acomputer, may be only good for 4 or 5 years. Butall investments must last more than one year. Bydefinition, a cost that recurs every year is not aninvestment, it is an operating cost (like purchasingfertiliser).

Land is a special type of investment. Unlike othertypes of investments, land usually does not losevalue over time, and is considered to lastindefinitely. As a result, while the average annualcost of a truck may be the cost of the truck dividedby the number of years it runs, for land the averageannual cost is usually assumed as zero; it can beused for many years and still has the same value.Buildings made of stone or other solid materialsmay also last a long time, but they must usually bemaintained, and so will ahev an annual costassociated with them.

Not all investment is in the form of physical goods(buildings, machinery etc.), although these aretypically the most frequent. One can also invest inless tangible items, such as training, design ofpackaging, or in accounting systems – but the samerule applies: each of these investments is a one-offexpense that produces over a number of years.

Despite the above rule, it is not always easy todecide whether an item should be treated as aninvestment. The most common example is the costof establishing or purchasing permanent crops orlarge livestock. While the establishment of eachhectare of coffee, or purchase of each breedingcow, is clearly an investment, if it is intended toestablish/purchase frequently during the projectperiod (e.g. rehabilitation of 20 has of citrusundertaken on the basis of 4ha per year over 5years), it may well be easier to treat them as anoperating expense.

2. Production or Operating Costs

Investment costs are not the only type of costsfacing a project. Once the investment is completed,the vast majority of projects (and all incomegenerating activities) will have costs of operation orproduction. In the case of a local road, these maybe no more than annual repair and maintenance,but for a dairy processing plant, these operatingcosts will include raw materials (milk), labour, otheradditives, packaging and electricity, to name only afew. Production or operating costs have thecharacteristic that they are recurring; that is theyare incurred regularly, on a periodic basis that canbe daily, monthly or at some other interval, but willbe at least annually.

A second key characteristic of production oroperating costs is that they arise directly from theuse or functioning of the investment. They aredirectly affected by the scale of these activities (for

this reason they are also sometimes referred to asdirect costs). Thus, if the project operates at onlyone half of the level that it did in the previous year,the operating costs will also decline.

Labour is considered a production or operating costif it is paid in relation to the scale of activity.Workers paid only when there are tasks to be done(e.g. harvesting, working on the production line ina plant) would therefore clearly be productioncosts. However, the salaries of any staff paidwhether the project is running at full capacity, ornearly stopped (for example, the manager, or themechanic in charge of the machines), would not beclassified as a production cost, but rather as ageneral or overhead cost (see below).

It is not always easy to make the distinctionbetween these two categories. For example, a vetwho comes every month to examine the cattle in adairy operation: is his or her payment classified as aproduction cost? The answer is that it depends onhow the vet is paid. If it is per animal inspected, itis clearly a production cost. If, however, a vet is paidper visit (no matter how many animals there are), itwould be a general or overhead cost (see below). Auseful rule of thumb is that any cost that varieswhen the scale of operation changes by 20%, is aproduction cost.

3. General and Maintenance Costs

General and maintenance (or overhead) costscomprise the third category of costs faced by aproject. These are costs that occur because theproject exists, but which do not depend on thescale of operations. These might include officeexpenses, routine maintenance, local taxes,accounting services, or the cost of keeping a truckthat performs a variety of jobs. Although they haveto be paid on a regular basis (unlike investmentcosts) these costs often stay the same year afteryear, especially if inflation is not taken into account.

F. Environmental Sustainability

When preparing a project profile, it is not necessaryto devote a lot of effort to consideringenvironmental factors. However, it is important tobe aware from the very beginning of the sort offactors that could lead to sustainability problemswhen full project preparation (Module 3) isundertaken.

Environmental sustainability deals with the impactof the proposed project on the natural resourcesand environment in the area of the project. If it isintended to use a small stream to irrigate a largearea, the amount of water needed might be morethan could be drawn from that source during thedry period of the year. As a result, the irrigation


22

system could fail, or there could be insufficientdrinking water available to communitiesdownstream. Such a project would not besustainable. Projects which result in the destructionof natural forests, mangrove swamps, wetlands orother natural areas are also likely to beunsustainable, as the impact of these changes maywell damage the livelihoods of the communities inthe area, and result in erosion and other damage tothe environment.

It should also be remembered that many sources offinancing for projects will not approve activities thatlead to environmental damage, so although the

project may seem very profitable, it will beimpossible to obtain the required loans or grants toimplement it.

There are projects that may cause environmentaldamage if poorly designed, but will not if the designis properly thought out. This often involvesconsidering ‘mitigation’ measures that will reducethe environmental impact. An example might be aslaughterhouse producing much waste material,which would pollute the waters of the river intowhich the effluent is pumped. Here the inclusion ofwastewater treatment tanks may permit the waterto be purified before entering the river, and thuseliminate the problem.


Chapter V

COMPLETING AND INTERPRETINGTHE PROFILE


24

V community, either as a result of undertaking Module1, or through some other form of communitydiagnosis and planning exercise. The only exceptionto this rule would be where the applicant is anindividual or single family. As a result, the technicianshould already have at his or her disposal themajority of the information needed to describe theproposed project in general terms.

Nevertheless, the following checklist may be usefulin ensuring that all required information is noted. Itis worth remembering that this information maynot all need to be collected at the beginning of thesession. Information on environmental impact orrisks are, in fact, probably better discussed after thebasic project design has been completed, as peoplewill have a clearer picture of the project in theirminds once they have been through such aspectsas the investment and operation of the project.

c Name of the proposed project;

c Location of the project;

c Exchange rate (to the U.S. dollar) at the timeof preparing the profile;

c The name of the main beneficiary group(otherwise assign a name or use name of thecommunity);

c Description of the beneficiaries, including: (i)when group established; (ii) purpose of thegroup; (iii) whether they are drawn from morethan one community; (iv) what they havedone in the past; (v) current activities; (vi)breakdown of the membership by men,women, children;

c Identification of direct and indirectbeneficiaries (see Section 4.2), divided intomen, women, and children, where possible;

c A description of the project, including itsjustification and principal activities;

c The nature of the demand that will be met bythe project or its output;

c The possible environmental impact of theproject;

c Any other relevant information, such as relatedprojects undertaken in the past, other possiblefunding sources etc.

C. The Investment

Although it is not necessary to start with theinvestment, and this section can be filled in afterdescribing the operation of the project if preferred,most people are more comfortable by commencingthe profile here. First list what will be needed tomake the investment a reality. Generally, it is easierto break these needs down in to three categories –

COMPLETING ANDINTERPRETING THEPROFILE

A. Introduction

As has been mentioned several times in thecourse of this manual, the project profile must

be completed in a participatory manner, with thefull collaboration of the applicants. This is vital for anumber of reasons (see Section 2.3) and thetemptation for the local technician to prepare theproject profiles on his or her own should be avoided.Equally, the technician should be wary of groupswhere only one or two people speak throughout themeeting. These people may be presenting the viewsof the entire group, but they may also simply be themost important people in the room, and thusdeferred to by the other participants. In the samemanner, women may not wish to speak up in frontof men, or may not even be invited to participate inthe group meeting. Where these sorts of problemsarise, it may be necessary to have more than onemeeting and create several possible profiles ordevelop a combined profile that is synthesised fromthe different meetings.

No elaborate materials are needed for theparticipatory preparation process. If no room can befound that is large enough for the entire group, thesession can be held out of doors. A large blackboardor flip chart for writing on is useful so the wholegroup can see, but it is possible also to write onlarge sheets of paper and stick them to a wall withsticky tape or pins.

If using paper, the basic table formats with headersand columns covering background information,investment, operating costs and overheads can beprepared in advance, but again this is not essential.A simple calculator is often useful for multiplyingquantities together.

If the profile is to be transferred later onto thecomputer by the local technician (often necessary ifa formal report, or request to proceed to fullpreparation, has to be made), it is strongly suggestedthat the technician provides group members with acopy of the final computer generated report. Thiswill ensure that they are kept fully informed of theapplication process, and avoids latermisunderstanding if the computer profile differsslightly from the exercise conducted at village level.

B. Background Information

In the majority of cases, the technician working withthe applicants to prepare a project profile shouldalready have a good knowledge of the group or


25

materials, labour and professional services – and thismodel will have to be followed if the information islater to be entered into the computer. Remember: atthe profile stage it is not necessary to providedetailed information as to each investment item. Inthe case of an irrigation system, for example, insteadof describing the number of lengths of each type oftubing, it is sufficient to state “irrigation piping” andput a single figure.

For each investment item the following informationwill be needed:

c Description of the item;

c The unit of measurement (item, metre, set,etc.). For labour, the unit of measurementshould be a day, a week, a month or someequivalent period of time;

c The number of units;

c The cost per unit (which can then be multipliedwith the number of units to give a total cost);

c The contribution of the applicants to the costof that item (if any);

c The economic life of the item (the number ofyears it will function before being replaced)

c The salvage value (the market value of theitem at the end of its economic life)

Once this information is obtained (and mostproject profiles will have no more than 6-8investment items) it is necessary to calculate theamount of money that would have to be set asideeach year in order to allow the investment items tobe replaced as they complete their economic lifespans.

The ideal solution is to charge the cost ofreplacement to the year in which it occurs, asoccurs in the detailed project analysis, but this isnot possible for a project profile. Instead theconcept of the ‘annual replacement reserve’ isused. In this concept the initial purchase cost of theitem is divided by the number of years of economiclife, to determine the amount that would have tobe put aside each year to provide for replacement.Thus:

Value of the item when new ($500) – Savage value of the item ($100) = $40/yearEconomic life of the item (10 years)

If this is not done, the project would receive the useof the investment free of charge, and once theitems wear out, there would be no reserves to payfor their replacement. This calculation, therefore,should be made for each investment item in the lastcolumn of the table, and the total of all the items

added up at the bottom of the table. This sum willrepresent the entire amount to be set aside eachyear to ensure the investment can be replaced asthe items wear out.

D. Operating Costs and Income perActivity

In many cases, a community level project will haveonly a single activity; for example a bus serviceconnecting the community with nearby towns, ora day care that will look after the pre-schoolchildren of the village. However, in other cases asingle investment may permit more than one typeof activity. This would be the case for an irrigationscheme that allows several different crops to begrown, or a dairy plant that produces cheese,butter and yoghurt.

The first step in defining operating costs and(where applicable) income, therefore, is to decidewhether separate activities will result from theinvestment. Where an activity has clearly separatecosts (and if income generating, separate earnings)it should be treated separately3. If, however, thecosts and income of the different actions areinevitably mixed together (as would be the case fora village bus that sometimes goes to one town andsometimes another, but uses the same vehicle,driver and assistant) then it should be treated as asingle activity. If there is any doubt, it is probablybest, at the profile stage, to treat it all as a singleactivity, in order to keep the analysis simple.

The second step – using the definitions discussed inSection 4.3 – is to define with the group the unit ofproduction, and determine the number of unitsinvolved. For crops, as we have seen, the unit ofproduction is generally the hectare, acre or othermeasurement of area. So for tomato production wemight have 2.5 hectares. For other activities, it isthe unit by which the costs would be most readilymeasured. This may be the entire investment e.g.the school, the clinic (in which case the number ofunits would be one), or a part (a kilometre of theentire road of 8 km., or one pond of a communityaquaculture project with 5 ponds).

Finally, the group must decide the length of theproduction cycle and the number of cycles peryear. Again, for crops this is generallystraightforward – the length of the cycle is thelength of the growing period (including landpreparation and harvesting), while the number ofcycles is the number of times that the crop is to beplanted during the year – typically once or twice.For other types of activity, especially those whichare continuous, it is often easier to use as the cyclethe period on which most costs are based – e.g. a

3 The term activity is replaced in Module 3 with the more accurate phrase of a ‘block’, but activity is a more immediatelyunderstandable term and will be used at the level of the project profile.


26

week or a month – while the number of cycles willbe the number required to fill the year (e.g.12cycles of 1 month)

1. Operating Costs by Activity

Once these basics are decided, the group mustidentify and write down the costs incurred inoperating the activity per unit of production perproduction cycle. This is probably most easilyexplained using an example:

Community Poultry Operation (Broilers)

In the case of village level production, there may befew additional operating costs other than these, butother projects may have more costs to consider. If,however, the profile extends to a dozen or morecosts, the profile is probably becoming toocomplicated and should be simplified.

Total Cost per Unit per Cycle:(315 + 1,140 + 240 + 1,000) = 2,695

Total Cost per Unit:4 cycles x 2,695 = 10,708This includes all cycles

Total Cost:10,708 x 3 sheds = 32,340This includes all units

2. Income per Activity

Where a project generates income or earnings,income must also be included in this section.Remember, however, that income must becalculated on the basis of the same parameters(unit of production and cycle of production peractivity), as the costs described above. In addition,the calculation of income requires one further

parameter (or definition) to be determined – theunit of sale. For agricultural products this isgenerally a measure of weight; a kilo, a ton or alocal measure such as a bushel. But even for crops,the unit is not always weight. Lettuce and someother crops are sold by the piece. For livestock itcan also be per animal (price per chicken), or on aweight basis. For processed and manufactureditems, it is typically per item (price per can of paste,pair of shoes, or loaf of bread), although weight canalso be used (kilo of cheese, litre of drink).

For each unit and cycle of production (hectare/crop,etc.) we need to know the output in units of saleand the price received per unit. Again, this isgenerally readily understood for crops. Tomatoesmay yield 4,500 kg. per hectare per crop, and sell atan average price of 1.2 units of local money (pesos,dollars, francs etc.) per kilo. For a juice plant with aproduction unit of a case of 12 x 1 litre containers,the sales unit is the same, so we need to know theprice at which each case is sold. But where theproduction unit is per 1,000 litres of raw milkprocessed (as might be the case in a dairy plant),and the cycle of production is one day, then wemust know: (a) how many sales units (kilos ofcheese, etc.) are produced per 1,000 litres of input;(b) how many thousands of litres are processed eachday (we needed this information to calculate totalcosts per cycle); and, (c) the price per sales unit.

Estimating income per activity is usually one of theweakest areas of an investment project proposal.Firstly, the fact that an investment has the capacityto produce at a certain level does not mean that italways (or indeed, ever) will do so. Many plantsand factories work at less than full capacity, andmany crops never reach the maximum yields seenin research station trials. Secondly, not all productthat is produced is always sold. Some output maybe damaged, and other output might not find abuyer. This is particularly the case for perishableitems. Thirdly, prices used in estimating income areoften optimistic, and sometimes wildly so.Remember that prices can vary considerably overthe course of a year, especially for seasonalproducts such as are common in agriculture.Unless the project is specifically designed andoperated to supply output at times of short supply,it is unlikely that it will obtain the highest prices forits output. These considerations are discussed inmuch more detail in Module 3 (Detailed ProjectFormulation and Evaluation). Here it is enough toinsist that a healthy dose of scepticism should beapplied to estimates of both output (yields etc.)and prices.

3. Incremental Costs and Income by Activity

When estimating operating costs and incomewithin the context of a project proposal, it is notuncommon to find cases where project investments

Unit of Production:

Number of Units:

Cycle de production:

Number of Cycles per Year:

Poultry shed (1,000 birds)

3 Sheds(per cycle)

3 months (includingtime to clean out anddisinfect the shed)

4

Cost Item

Day old chicks

Feed

Supplement

Labour

Unit

Chick

Bag (25 kg)

Bag (10 kg)

Day

Cost/unit

0.30

12.00

20.00

20.00

No. ofUnits

1.050

95

12

50

Total Cost

0.3x1,050=315

12x95=1,140

20x12=240

20x50=1,000


27

improve performance or productivity of existingactivities. Under such circumstances, investmentimpact should be assessed based on incrementalcosts and benefits. In General, incrementalparameters are difficult to estimate withoutconsidering existing costs and benefits. Because ofthis, estimation of cost and benefits with andwithout project has become a standard practice.Operating costs and income of existing activities orwithout project are estimated as described above,just like any proposed activity with project.However when aggregating total costs and income,remember that costs and income of existingactivities which will change as a result of projectinvestments, must be substracted from costs andincome of ‘with project’ activities. For example, if aherd of ten cows produce 8 litres/day for 180days/year (at a price of $1/litre), with availablepastures and minimum inputs, the ‘without project’annual income would be $14,400. With pastureimprovement investments, the same herd couldproduce 10 litres/day for the same period and saleprice, the ‘with project’ annual income would be$18,000. Thus, the incremental annual incomewould just be $3,600.

E. General and Maintenance Costs

General and maintenance costs (sometimesreferred to as overhead costs) refer to those coststhat are incurred by simply undertaking the project.They will have to be paid whether the chickensheds are full or empty, or whether there are fifteenpatients a day attending the community healthclinic or none. As they do not vary according to thescale or size of the activity, they do not appear inoperating costs (see previous section)

At the level of the profile there are usually fewgeneral costs. One of the most important ismaintenance. Maintenance often has to beundertaken whether the machinery or equipment isused heavily or lightly. Roads will often have to bemaintained due to damage by weather, irrespectiveof the number of vehicles travelling along them.Equally, buildings, other structures and many typesof machinery must also be maintained.

Typically, it is easiest to estimate a simplypercentage of the initial investment formaintenance. Thus if maintenance is estimated at5% per year and the initial cost is 50,000, theannual maintenance would be 50,000 x (5/100),or 2,500. In the next table are included indicativemaintenance levels for different types ofinvestments. These are intended as guides only,and may need to be adjusted for your particularcircumstances.

Note that there are some types of investment thathave no maintenance costs at all, for example mostfurniture. Generally, a desk or table is simply useduntil it is too old, when it is replaced.

A second important type of general cost is that arisingfrom permanent staff. While casual labour may behired and paid on a daily or weekly basis as needed,technically trained and qualified staff, or those withimportant skills, must be kept on permanently – evenif there is no work – otherwise they will not beavailable when they are next needed. This mightinclude teachers, nurses, mechanics, supervisors,administrative staff and managers. As long as theproject is still functioning, these categories of staff willhave to continue to be paid.

When calculating their costs, do not forget toinclude (if applicable) social security contributionsand other payments that the project (as employer)will have to make. Remember, at the profile stage itis not important to be very accurate about salariesand related costs. As long as they are realisticestimates, this is acceptable at this stage.

Other types of general cost are less common at theprofile stage, but might include: local and landtaxes; electricity and water costs; vehicle operatingcosts (especially where the vehicle is used acrossmore than one activity, and hence can not beassigned as a specific operating cost); fees forperiodic audit, accounting and general technicalassistance visits; and office operating costs (where afairly large commercial activity is planned). At theprofile stage, attention should only be given tosuch costs if it is believed that they may be asignificant part of the overall costs.

Stone, brick or metal buildings andstructures; major water channels;wells; settlement ponds

2 - 3%

Lighter wooden buildings, heavymachinery (including tractors andtrucks), secondary water channels,fish ponds

4 - 6%

Light machinery (including cars), andgeneral equipment

7 - 10%

Electronic and laboratory equipment(computers, printers, testingequipment etc.), outboard motors

12 - 15%


28

F. Preliminary Estimate of Viability(Income Generating Projects Only)

In addition to looking at general factors, such as theoverall project concept, the proposed beneficiaries,

and the way in which the project would beorganised, three principle measures of projectviability are calculated at the community level forincome generating projects. These are the netincome per year, the number of years of net incomerequired to pay back the investment required, andthe net income after allowing for replacement ofthe original investment. Together they provide asimple but useful guide to whether the profile isworth developing into a detailed project proposal.

If a profile produces a positive result for each ofthese tests, and if it also responds to the prioritiesand needs of the applicants, then the project isprobably worth developing from the profile to thefull project stage. Each of these three tests isdiscussed briefly below:

1. Project Net Income per Year

Net income is a very simple concept – it is theincome left after all costs (both operating andgeneral) have been paid. Even if the applicants arelargely illiterate and with little or no previousexperience in projects, they are generally fullyaware that an activity that costs more than itmakes, is not a good proposition. A profile thatyields a positive figure for Net Income has thuspassed one test.

If the profile tables have been laid out according tothe guidelines provided here (see the Annexes forsample layouts), the calculation of net income issimply a matter of taking the total income figurefrom the costs and income table and subtractingfrom that figure the total operating cost and thetotal general cost.

2. Number of Years Required to Repay theInvestment

While it is necessary that an income-generatingproject earn more than it costs to operate, this isnot enough. The applicants must also have somemeasure of whether a positive net income figure issufficient or too small to be worth having. This canbe measured by looking at how many years of thenet income are needed to cover the cost of theoriginal investment.

Typically, investment costs provided by thecommunity are included in the total investmentamount, but if the community or applicant isconfident that this contribution can be repeated inthe future without difficulties, it may be worthexcluding it, if only to provide an idea of thedifference.

The calculation is simple:

Total Investment / Net Income = x years

Or:

10,000 / 3,000 = 3.3 years

In all cases, the smaller the number of yearsrequired to repay the investment, the better.Clearly, a risky project (that is one involvingactivities new to the group, or where demand isdifficult to estimate) should have a shorter numberof years to payback compared with an activity wellknown and understood by all involved, in order tocompensate for the risk. As a rule of thumb, noincome-generating project that requires more than7 or 8 years to repay the original investment shouldbe selected for further development, unless thereare strong social or other reasons to proceed.Where the project is acknowledged to be risky, thisfigure should probably drop to 4-5 years.

3. Net Income after Allowing for InvestmentReplacement

One further financial test of the profile is important.It is possible that a project will generate anattractive positive net income, but that the costs ofeventually replacing the investment involved willreduce that income significantly, or even make itnegative. For this reason, it is worth consideringhow the net income will be affected if the ‘annualreplacement reserve’, calculated as part of theInvestment costs table, is charged to the netincome used above.

To calculate the net income after allowing forinvestment replacement, simply subtract theannual replacement reserve from the net incomecalculated previously. If the figure is still positive,the net income is large enough to also provide forthe eventual replacement of the current investmentitems.

G. Preliminary Beneficiary Estimates(Non Income Generating ProjectsOnly)

Perhaps the most important difference betweenincome-generating and non income-generatingprojects is that the latter are not selected or justifiedon financial grounds, but rather on the basis of thecontribution that they will make to the social,cultural or productive life of the group orcommunity. Clearly such aims are much moredifficult to measure and assess that those relating tofinancial success. In fact, many financing agenciestend to focus primarily on the process within whichsuch proposals are developed (to ensure that they


29

are indeed representative of the needs of thecommunity), and at their cost per beneficiary.While neither of these measures tells an outsiderwhether the project is a good one or not, they doat least ensure that qualifying projects are a priorityfor their community, and do not absorb more thantheir fare share of resources.

The RuralInvest profile concentrates only on thesecond of these two measures – that of averagecost per beneficiary – but it examines variousaspects of this cost per beneficiary, including cost ofinvestment and cost of operation.

The cost of investment calculation is relativelysimple. The total cost of investment, calculated inthe investment table, is divided; first by the numberof direct beneficiaries, then by the total number ofbeneficiaries (direct and indirect). This provides theaverage investment cost per direct beneficiary andper all beneficiaries. This measure is frequently usedby funding agencies to ensure that one group orcommunity is not receiving more than its fair shareof available resources. It is often useful to make thiscalculation also in terms of the amount of theinvestment that derived from the group orcommunity’s own resources and those for which adonation is required. Taking the example of acommunity health clinic (Table A).

What do these calculations tell us? They tell us thatalthough the total investment cost is $250 perdirect beneficiary, this is reduced to $50 if allbeneficiaries (direct and indirect) are taken intoaccount. It also tells us that if one looks only atdonated resources, costs per direct beneficiary arereduced to $200 and costs for all beneficiaries toonly $40. These are important numbers for thefunding agency to know, but may also be ofinterest to the applicants themselves in helpingthem understand the costs that they will have tobear to make the project a reality.

A second set of calculations are similar, but use thetotal operating cost. If this total operating cost,comprising operations, maintenance and any otherfixed costs, is divided by the number of direct andindirect beneficiaries, it will reveal the level ofresources that will be needed to keep the projectfunctioning for each beneficiary. Although usersmay not contribute directly to covering these costsin all projects (for example in the case of an accessroad) this figure is very important in showing therelative expense of keeping the project going.These calculations can be made still more useful bydividing the costs into fixed (maintenance andoverhead costs) and variable (those which dependon the level of use of the project). (Table B).

Basic Information from Profile:

a) Total investment cost forproposed clinic:

b) Total value of communityresources to investment:

c) Total donation required:

d) Estimated number of directbeneficiaries (per year):

e) Estimated number ofindirect beneficiaries:

$50,000

$10,000

$40,000

200

1000

Calculations:

- Total investment per directbeneficiary (a/d):

- Total investment per allbeneficiaries (a/d+e):

- Investment cost (own resources) per directbeneficiary (b/d):

- Investment cost (donatedresources) per directbeneficiary (c/d):

- Investment cost(own resources) per allbeneficiaries (b/d+e):

- Investment cost (donation)per all beneficiaries(c/d+e):

$250(50,000/200)

$50(50,000/200+800)

$40(10,000/250)

$160(40,000/250)

$10(10,000/200+800)

$40(40,000/200+800)

Here we can see that the project managers willneed an estimated $25 per direct beneficiary peryear, or $5 for each person in the area (direct +indirect beneficiaries). However, only $17.5 perdirect beneficiary, or $3.5 per local inhabitant isneeded to cover fixed expenses (the nurse, upkeepof the building etc.). The remainder of the costs($7,5 per direct beneficiary) occur only when thereare patients to treat (to cover medicines, linenetc.). This might suggest, for example, thatpatients should pay at least $7.5 per visit, to coverthese variable expenses, although if they couldafford more (say $10 per visit), this would reducethe amount the community or local governmentwould need just to keep the clinic operational.

Table A


30

Basic Information from Profile:

f) Total estimated cost ofclinic functioning:

g) Fixed cost (maintenanceand overheads):

h) Variable cost (dependantupon number of patients):

$5,000/year

$3,500/year

$1,500/year

Calculations:

- Annual operating cost perdirect beneficiary (f/d):

- Annual operating cost per allbeneficiaries (f/d+e):

- Fixed cost per directbeneficiary (g/d):

- Variable cost per directbeneficiary (h/d):

- Fixed cost per allbeneficiaries (g/d+e):

- Variable cost per allbeneficiaries (h/d+e):

$25(5,000/200)

$6,25(5,000/800)

$17,5(3,500/200)

$7,5(1,500/200)

$3.5(3,500/200+800)

$1.5(1,500/200+800)

Table B


Chapter VI

NEXT STEPS


VI

32

NEXT STEPS

Completing the profile is an important stepforward for any applicant, whether they be a

community, group or even an individual. Preparingthe profile will help them to see much more clearlythe key elements involved in the proposal, from theoverall investment required to the costs incurred inkeeping it running. It will make them think aboutthe market that the project will face and the incomethat the project might generate, if it is for-profit, orthe strength of demand and the cost perbeneficiary, if it is a not-for-profit project. Equallyimportantly, it will give them a broad idea as towhether the proposed project makes sense – eitheras a money earner, or as a cost to the group orcommunity that will have to be met every yearonce the project is fully functional. Getting to thisstage will frequently involve considerable discussionwithin the group, and often will require manycompromises, as the scale of the project, and thenumber of activities that it will include, has to berethought to match with reality.

Not all profiles will emerge from the evaluationprocess with positive results. This does not meanthat the idea should be immediately abandoned. Itmay be that changing the number or scale ofactivities will render an unattractive project viable,or that the nature of the product needs to berethought to better fit the type of demandforeseen. Remember, however, that ‘cooking’ theresults to ensure a positive outcome helps no one.One of the roles of the local technician is to helpthe applicants to see which ideas make sense andwhich don’t. If a project seems to make no sensebut the group still wants to push ahead with it, it islikely that they have other reasons for favouring theproposal that have not emerged during the profilepreparation. The group may not always be honestwith a visiting technician, or it may simply be thatthey have not expressed clearly some of the keyreasons why the project is desirable to the group.Either way, it is the technician’s job to try andunderstand what these ‘hidden’ reasons may be,

and to bring them out into the open so the profilecan more accurately portray the real situation.

An alternative problem may arise if more than oneproposal seems to be viable, and the group canonly make a single submission for detailed analysisand eventual financing. Unless the differencesbetween the completed profiles are very large (e.g.the cost of investment is repaid in 2.5 years in oneprofile but in 15 years in the other), the evaluationprocess presented here is simply not sufficientlyaccurate or detailed to select between differentproposals. Where the viable profiles include bothincome generating and a non-income generatingprojects the profile evaluation process can provideno help at all: these two types of projects are simplynot comparable. If both production of eggs for thelocal market and the construction of a communityday care seem feasible, other guidance is needed. Itis here that the importance of a proper communitydevelopment plan becomes apparent; if groupobjectives and priorities have been clearly thoughtout beforehand, then there will already exist a basisfor selecting between these two alternatives.

In most cases, some form of higher approval will berequired before a community can access theresources it needs for full project preparation (seeModule 3) or – where the project is very small – itcan obtain the financing for implementation.Normally this will involve the technician who hasbeen working with the group presenting the profileto the financing or projects committee of thesupporting agency, but it is always preferable if oneor more of the applicants can attend the meeting,so as to ensure full community involvement. Thefaster the approval process, the easier it is tomaintain the interest and commitment of theapplicants. If it takes six months before thetechnician can return to the applicants withapproval to move to the next stage, the proposalmay have been largely forgotten in the worries ofeveryday life, and the technician will have a muchharder job to get the group together once more tostart work on the full-scale preparation process.


ANNEX 1

PROJECT PROFILE FORMATS


34

- Project Profile

Date: _______________

Project Title: _______________________________________________________________________

Project Location: Community: ______________________________________________________

Municipality: _______________________________________________________

Province: _________________________________________________________

Number of families in applicant group: ___________

Investment Cost : Total Cost : ____________ Cost per family: ___________

Prepared by: ______________________ Organisation: _____________________ Tel.: ___________

Provide below a brief description of the proposed project, including the following details: a) project justifi-cation and objectives; b) description of the investment; c) activities to occur under the project; d) descriptionof participants/beneficiaries; and e) proposed project management and organization (who will be responsi-ble, how will it be run, etc.).

Page 1


35

Proj

ectP

rofil

e-I

nves

tmen

tCos

ts

PRO

JEC

TTI

TLE:

____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

Dat

e:__

____

____

____

____

____

____

____

CO

MM

UN

ITY:

____

____

____

____

____

____

____

____

____

____

____

____

____

____

____

__O

RG

AN

ISAT

ION

:__

____

____

____

____

____

____

____

____

____

____

____

____

____

__

INVE

STM

ENT

(Item

)

1

UN

ITO

FM

EASU

REM

ENT

2

QU

AN

TITY

3

CO

STPE

RU

NIT 4

TOTA

LIN

VEST

MEN

TLI

FEO

FIT

EM(Y

EA

RS

)

8

SALV

AG

EVA

LUE

AN

NU

AL

INVE

STM

ENT

CO

ST

11=

(5-1

0)/8

TOTA

L

5=

3x4

APP

LIC

AN

TC

ON

TRIB

UTI

ON

6

EXTE

RN

AL

FUN

DIN

G

7=

5-6

PER

UN

IT

9

TOTA

L

10=

9x3

A.G

OO

DS

–M

ATER

IALS

SUB

-TO

TAL

-GO

OD

SB

.LA

BO

UR

SUB

-TO

TAL

-LA

BO

UR

TOTA

L

Page

2


36

RuralInvest Project Profile

INCOME AND OPERATING COSTS PER ACTIVITYComplete this page for each product, crop or activity of the project

When existing activities are affected, complete this page for activities with and without project

PRODUCT/ACTIVITY: _______________________________________________________________________(0)

UNIT OF PRODUCTION: _____________________ Number of units of production:___________________(1) (2)

Duration of each production cycle (in months to a max. of 12) _____ Number of cycles per year: _____(3) (4)

INCOMEINCOME ITEM

5

UNIT OF SALE(kg, qq, etc.)

6

PRODUCTIONPER CYCLE(units sold)

7

SALE PRICE(price/unit)

8

TRANSPORTCOST

(cost/unit)9

TOTAL INCOMEPER CYCLE

10=7x(8-9)

INCOME PER UNIT OF PRODUCTION PER CYCLE (11)

INCOME PER UNIT OF PRODUCTION PER YEAR (12) = (11) x cycles per year (4)

VARIABLE OPERATING COSTS

INPUTS / MATERIALS

13

UNIT(kg, head, etc.)

14

QUANTITYPER CYCLE

15

COST PERUNIT

16

TRANSPORTCOST

17

TOTAL COST PERCYCLE

18=15X(16+17)

COST OF MATERIALS PER UNIT OF PRODUCTION AND PER CYCLE (19)

LABOUR

20

NOMBEROF

PERSONS21

WORK PERIOD(day, month)

22

NUMBER OFPERIODS PER

CYCLE23

COSTPER

PERIOD24

TOTAL COST PERCYCLE

25=21X23X24

LABOUR COST PER UNIT OF PRODUCTION PER CYCLE (26)

VARIABLE COST PER UNIT OF PRODUCTION PER CYCLE (27) = (19) + (26)

VARIABLE COST PER UNIT OF PRODUCTION PER CYCLE(28) = (27) x cycles per year (4)

INCOME MINUS VARIABLE COST: PER UNIT OF PRODUCTION PER YEAR

Page 3


37

Project Profile

TOTAL INCOME AND COSTSWhen activities with and without project are considered, total figures of activities without project

must besubtracted from total figures of activities with project

PRODUCT ORACTIVITY

page 3:(0)

Number of unitsof production

page 3: (2)

INCOME VARIABLE COST INCOME MINUS VARIABLECOST

PER UNIT/YEARpage 3: (12)

TOTAL PER UNIT/YEARpage 3: (28)

TOTAL PER UNIT/YEARpage 3: (29)

TOTAL

1 2 3 = 1x2 4 5 = 1x4 6 = 2-4 7 = 1x6

TOTAL PERYEAR

GENERAL(entire project)

UNIT(month, visit, etc.)

NUMBER OF UNITS PER YEAR COST PER UNIT TOTAL COST PERYEAR

8 9 10 11 12=10x11

TOTAL GENERAL COSTS PER YEAR

Page 4


38

Project Profile

FEASIBILITY/SUSTAINABILITY

DESCRIBE FORESEEN MARKET (for income generating projects, specify selling place, buyer and condi-tions):

PRELIMINARY FEASIBILITY – INCOME GENERATING PROJECTS ONLY

A. ABILITY OF THE PROJECT TO COVER ITS COSTS

TOTAL INCOME PER YEAR (page 4: total in column 3) __________________ (1)

TOTAL VAR IABLE COSTS PER YEAR (page 4: total in column 5) __________________ (2)

TOTAL GENERAL COSTS PER YEAR (page 4: total in column 12) _________________ (3)

TOTAL AN NUAL COSTS ________________ (4)

NET INCOME PER YEAR = (1) - (4) _________________ (5)

B. NUMBER OF YEARS OF NET INCOME REQUIRED TO COVER THE INVESTMENT

TOTAL INVESTMENT (page 2: total in column 5) __________________ (6)

NUMBER OF YEARS REQUIRED = (6) / (5) __________________ (7)

C. NET ANNUAL INCOME AFTER ALLOWING FOR INVESTMENT COST

ANNUAL INVESTMENT COST (page 2: total in column 11) ______________ (8)

NET ANNUAL INCOME AFTER INVESTMENT COST = (5) - (8) ______________ (9)

Page 5a


39

nvest Project Profile

SOCIAL COSTS

PRELIMINARY BENEFICIARY ESTIMATES

A. INVESTMENT PER BENEFICIARY

TOTAL INVESTMENT (page 2: total in column 5) _________ (1)

Applicant Contribution __________ % [(page 2 column 6 / page 2 column 5) x 100]

Extrenal Contribution __________ % [(page 2 column 7 / page 2 column 5) x 100]

PROJECTED NUMBER OF DIRECT BENEFICIARIES __________ (2)

Indicate if this is: Families ________ Individuals __________

TOTAL INVESTMENT PER DIRECT BENEFICIARY = (1) / (2) __________ (3)

EXTERNAL INVESTMENT PER DIRECT BENEFICIARY [(page 2: column 7 / (2)] _________ (4)

B. ANNUAL COST PER BENEFICIARY

TOTAL ANNUAL COST page 5: (4) __________ (5)

Of which: Varaible costs __________ % [(page 5: (2) / page 5: (4) x 100]

General/overhead costs __________ % [(page 5: (3) / page 5: (4) x 100]

ANNUAL COST PER BENEFICIARY (5)/(2) __________ (6)

DESCRIBE THE SOURCE OF FUNDS REQUIRED TO KEEP THE PROJECT FUNCTIONING(for non-income generating projects):

Page 5b


PAGINABIANCA 12-11-2003 14:48 Pagina 1

Further information on RuralInvestor other FAO Investment Centreproducts and services can beobtained from:

DirectorInvestment Centre DivisionFood and Agriculture Organizationof the United NationsViale delle Terme di Caracalla00153 Rome, Italy

Tel: (+39) 06 57054477Fax: (+39) 06 57054657

E-mail: [email protected] site: www.fao.org/tc/tciFAO Web site: www.fao.org

MODULE 2RURALINVEST

In recent years, locally designed and managed investment projectshave assumed increasing importance as effective tools forsustainable rural development. Supporting local communities toconceive and implement their own projects – whether for incomegenerating activities or for social investments – not only ensuresgreater ownership and commitment to those projects, but alsostrengthens the capacity of communities to contribute to andmanage their own development. However, the increasing adoptionof this approach by national governments, international financingagencies and rural banks has also highlighted the critical importanceof providing adequate support and guidance to national techniciansworking with communities and other groups in identifyinginvestment needs, defining potential projects, and developing themfor external financing.

RuralInvest answers this need by offering a series of modules,developed over a number of years and tested extensively in the field,which provide such support through a range of materials andtraining courses, and include technical manuals, custom developedsoftware and instructors’ guides. Modules currently in use or underdevelopment include:

Module 1: Participatory Identification of Local Investment Needs

Module 2: Preparing and Using Project Profiles

Module 3: Detailed Project Formulation and Analysis

Module 4: Monitoring and Evaluation of RuralInvest Projects

An associated training course "Assessing Demand for RuralInvestments" is also available to assist technicians to evaluatemarket and non-market demand for project outputs.

Module 2: Identifying and preparing project profiles

Module 2 draws upon earlier participatory needs identification workdescribed in Module 1 to guide users in the creation and use ofspecific project profiles. Designed to be created together with thecommunities and individuals seeking project financing, the profileshelp applicants to turn general investment ideas into concreteproject proposals, as well as to understand the key elements of aproject. Using simplified formats for defining project investments,operating costs and, where relevant, income, the profiles allow afirst assessment of feasibility and provide the basis for thesubsequent preparation of detailed project proposals.


R U R A L I N V E S T



MODULE 2

RuralInvest Mod.2 EN 07.qxd 21-11-2007 13:31 Page i

TC/D/A1420E/1/11.07/500

Documents

MODULE 2 RURALINVEST MODULE 2 · 2017-11-28 · Module 2: Identifying and preparing project profiles Module 2 draws upon earlier participatory needs identification work described