MODULE 3 RURALINVEST MODULE 3 · 2017-11-28 · Module 3: Detailed Project Formulation and Analysis Following on from earlier needs identification and project definition activities,

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

RURALINVEST

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.


Following on from earlier needs identification and project definitionactivities, Module 3 provides guidelines to assist local technical staffin developing high quality project proposals suitable for externalappraisal and subsequent monitoring and evaluation. Drawing onMS Windows-compatible software which can be extensivelycustomised to meet user needs, the Module facilitates thepresentation of essential project data and automates key calculationssuch as cash flow, working capital requirements, rates of return,employment generation and costs per beneficiary. The Modulecomprises this technical manual, software with a user’s guide, andtraining materials with an associated instructor’s guide.

MODULE 3

RuralInvest Mod.3 EN 07.qxd 21-11-2007 11:57 Page 100

MODULE 3

DETAILED PROJECTFORMULATIONAND ANALYSIS

R U R A L I N V E S T

A participatory approach to identifying andpreparing small scale rural investments


TC/D/A1421E/1/11.07/500

MODULE 3



Rome, ItalyOctober 2007

Investment Centre DivisionFood and Agriculture Organization

of the United Nations


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, 00100 Rome, Italyor by e-mail to [email protected]

© FAO 2007


1. INTRODUCTION TO RURALINVEST 2

A. The purpose of RuralInvest 2

B. The special nature of rural investments 3

C. Type and scale of projects appropriate for RuraInvest 4

D. The RuralInvest modules 4

E. RuralInvest users 6

2. THE DETAILED FORMULATION AND EVALUATION PHASE 10

A. Main elements of formulation and evaluation 10

B. Software scope and requirements 11

C. A brief warning 11

3. ESTIMATING DEMAND AND BENEFITS 14

A. Estimating demand in the presence of markets 14

B. Estimating demand in the absence of a market 19

4. EVALUATION AND SELECTION OF TECHNOLOGY 24

A. Reconfirmation of the scale of the project 24

B. Choosing the production technology 24

C. Experience and capacity of the applicants 25

D. Maintenance and repair 26

5. SUSTAINABILITY AND ENVIRONMENTAL IMPACT 28

A Why consider environmental impact? 28

B. What is environmental evaluation? 29

C. Procedures and stages of environmental evaluation 30

D. Assessment stages for category b and c projects 30

E. Special cases 31

F. Monitoring environmental impacts 33

G. Specialized support and environmental studies 33

H. Social impacts of rural investment projects and sustainability 33

I. The sustainability of non-income generating investments 34

TABLE OF CONTENTS


VI. ESTIMATING COSTS AND INCOME 38

A. Verification and classification of costs 38

B. Assigning costs and income by activity 41

VII. FINANCING THE INVESTMENT 50

A. Credit requirements 50

B. Loan characteristics 51

C. The changing value of money over time 52

VIII. ORGANIZATION AND MANAGEMENT OF THE INVESTMENT 56

A. Ownership structure 56

B. Supervision and oversight 57

C.Daily management 58

D.Technical assistance and managerial support 59

IX. FINANCIAL ANALYSIS AND THE PREPARATION OF RECOMMENDATIONS 62

A. Measurements of the investment’s feasibility 62

B. The impact of taxes 64

C. Preparation of recommendations 64

X. PREPARATION FOR THE INVESTMENT AND BEYOND 68

A. The importance of support and follow-up 68

B. Reaffirmation of the commitment of the applicants 68

C. Accompanying the applicants in financial negotiations and

seeking legal permits 68

D. Support in preparing a start-up plan 69

E. Purchase and contracting of goods and services 69

F. Follow-up to the implementation process 69

ANNEXES

APPENDIX 1A: Environmental Categorisation of Projects 72

APPENDIX 1B: Checklists for Environmental Assessement 79




Chapter I

INTRODUCTION TO RURALINVEST


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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 Foodand Agriculture Organization (FAO) in response torequests for a readily usable approach to theidentification and preparation of investmentsmuch smaller than those traditionally consideredin published guidelines 1

FAO, in cooperation with the multi-agency"Regional Unit for Technical Assistance" (RUTA) inCentral America, translated these initialexperiences into a general methodology andtoolkit, which have now been tested in a numberof countries with considerable success. As thenumber of users has grown, it has been possible toimprove and expand the different elements of theRuralInvest toolkit, as well as offer the package ina number of other 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 includedsuch measures as the transfer of financial resourcesto municipalities, 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 possibilitiesfor people to effectively participate in, andinfluence, the decisions that contribute to thesocio-economic development of their community,municipality or district.

Selection of investments at local level is notwithout its problems, however. It is not alwayseasy to determine which investments will yield thebest results. It may be that a bridge would have

* 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 oflarge-scale projects.

greater impact on a community than a new well,or that a dairy processing plant would make agreater contribution than an irrigation system, buthow to decide between them? Furthermore, notall investments 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),or to result in the destruction of natural resourcesthat cannot 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 trainedstaff located in those ministries and agenciesresponsible for economic and social planning.Using international formulation and appraisalprocedures, and often supported by specialistconsultants from international financing agencies,these highly trained staff have traditionallyfocused on preparing key multi-million dollarinvestments. The feasibility study for a newhydroelectric dam, for example, could take yearsand involve a multi-volume report costing millionsof dollars.

However, these staff typically have littleexperience in the analysis of smaller scale projects,where such in-depth analysis is clearly notjustified. Furthermore, even if these expertsadapted their procedures to the study of smallprojects, there would simply be too few experts tosupport the dozens of decentralized projects, thescores of autonomous municipalities, or thehundreds of community groups that are nowseeking to identify and formulate their ownprojects. What is needed is a different approach;one that that can be used to formulate andapprove small-scale projects using only localtechnicians and resources.

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

1. Applying standard procedures andexclusions

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 amajority of the community or groupapplying

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c Requiring the approval of the local Mayor orCouncil

c Excluding certain kinds of investments (forexample, no projects that might damagethe environment or religious structures willbe allowed);

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. Predefined investment models for eachexpected type of project

In this second option, a detailed study is carriedout for a number of "model investments", eachrepresentative of the type of proposal that areexpected to be received from participatinggroups, communities or municipalities. Allproposals must then use these models as the basisfor their submissions. This method has theadvantage of ensuring generally well designedprojects (because experts can be called in todesign each model), especially for infrastructureprojects that can be replicated from one place toanother (e.g. a health clinic).

However, predefined projects do not easily allowfor changes to the basic designs and thus riskfunding investments unsuited to local conditions(e.g. an irrigation system). They also tend to limitthe degree of local involvement and ownership, asdesigns are pulled "off-the-shelf", with little rolefor the local community. The need to followstandard designs and ensure identicalconstruction also tends to favour the use ofprofessional contractors rather than local labour,limiting local involvement even further. Finally, theuse of model investments generally excludes thepossibility of innovative projects for which nomodels exist. They are thus inappropriate whenfinancing a wide variety of rural investments.

3. Local-level project identification, designand analysis

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 ina wider sense; and (c) the creation of a real

commitment 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 andin their subsequent work with applicants. In mostcases local technicians will also need to besupported by subject-matter specialists (e.g.irrigation engineers, architects etc.) and beadequately supervised, to ensure the quality andcorrectness of the designs developed. A numberof attempts to use this approach in the past haveproven to be unsuccessful, largely due to theinability of local staff to effectively master thecomplex investment formulation tools developedfor use in multi-million dollar 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 toachieve this objective, using a number of separatebut interlinked modules which simplify the tasksof priority setting, project identification, detailedproject design and analysis, and finallymonitoring and evalaution of the implementationprocess.

B. The Special Nature of RuralInvestments

The key factors to be considered in theidentification, formulation and selection of aninvestment are the same whether it occurs in therural or urban sector. In fact, it is possible to applyRuralInvest to any type of small or mediuminvestment, rural or urban. However, RuralInvestconsiders a number of special features that areimportant only for projects in the rural sector:

a) The seasonal nature of many ruralactivities. Unlike urban investments, manyrural projects must take into account theavailability of resources (land, labour, capital)in different months of the year and relatethem to differing production patterns (e.g.crop and livestock activities). In addition,fixed costs may exist which are spreadthroughout the year, including duringperiods when no productive activity isunderway.

b) The heavy dependence on the use ofnatural resources. When evaluating possiblerural investments, environmental and naturalresource sustainability are often criticalfactors for long-term success.

c) The dispersion of human and economicactivities. Rural populations tend to be


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spread out, limiting access to infrastructure(roads, electricity) and services (schools,health clinics). Equally, input supplies,markets and other productive elements arealso dispersed. This means that greaterattention needs to be paid to such aspects asavailability of inputs and the cost ofdelivering the finished product to the buyer.

C. Type and Scale of ProjectsAppropriate for RuralInvest

RuralInvest distinguishes between two broadtypes of investment projects: those designed togenerate income, that is, for profit, and projectswhose principal purpose is not profit related.

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 machineryand spare parts, and marketing services. Aproject may, in fact, require investment in morethan one of these areas, and will frequentlyinvolve more than one type of productive activityfrom the same investment (e.g. production ofdifferent crops as a result of investment inirrigation)

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

c Production support: Including access roadsand bridges, electrification andcommunications, as well as primaryirrigation infrastructure;

c Social projects: Health and educationservices, provision of drinking water andsewage disposal, and support forcommunity organization;

c Environmental projects: Watershed and slopeprotection, reforestation and soilconservation.

It is important to note that projects in the non-income generating category may often includea user fee or charge designed to recover someportion of the operating costs. However, unlikethe "for-profit" projects, this income neverprovides the justification for the project, butmerely contributes to its sustainability.

Although the participatory methodology stressedthroughout the RuralInvest approach renders itparticularly appropriate for use with groups andcommunities, there is no reason at all why it cannot be used by individuals or families. However,

such personal applications generally omit thedetailed needs identification and priority settingthat is central to the first Ruralinvest module, andcommence directly with the project profile.

The project profile is the starting point for bothincome generating and non-income generatingprojects. Micro-investments (very simple projectswith an investment below US$5,000) often maynot require further preparation beyond this stage,as financing can be decided on the basis of the4-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 largelyto be used by general technical staff, while abovea certain investment cost it becomes worthwhileto contract specialists in a number of fields.

RuralInvest, therefore, is best used for small andmedium scale projects that run from perhapsUS$5,000 to somewhere not greatly exceedingUS$250,000, always depending greatly on thecomplexity of the project design.

D. The RuralInvest Modules

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

Module 1 – Participatory Identification ofLocal Investment 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 Phase Ibwhere the project profiles are developed.

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

a) Define the current situation of the group orcommunity, taking into account a range ofaspects, including physical (the location ofthe community, availability of land andwater, types of soils, slopes, etc.)environmental (forests, fishery, rainfalldistribution), and socio-economic andcultural (availability of markets, currentearnings of members of the community,migration, group solidarity, etc.);


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b) 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 thatdefines priorities for action according to theneeds of the applicants;

d) Identify one or more possible broadinvestments that would contribute tocarrying out 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.The technician will support and guide theapplicants in using the tools and guidelinesprovided by RuralInvest. Ideally, she or he willalready know the community, through residenceor previous work in the area, but in many casestechnicians will be assigned to work with theapplicants by the supporting agency as the resultof a specific request from the community.

Where there has been no prior contact betweenthe technician and the applicants, and a localdevelopment plan or its equivalent has never beenprepared, the diagnosis and identification phasemay require the technician to make a series ofvisits over a period of as long as three to fourmonths, depending on the degree of organizationof the group, the complexity of the constraintsand opportunities faced, and the accessibility ofthe community.

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 – Creating and Using Project Profiles

The core of Module 2 is the preparation of aproject profile for each priority investmentproposal. These profiles provide enoughinformation about the investment to allow boththe applicant(s) and the eventual financing sourceto see which ideas have potential, and are thusworth the further effort and resources required todevelop 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 undertaken

some 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 them.

Unlike Module 1, the local field technician mayneed to be supported during profile preparationby a subject-matter specialist. Where theproposed project involves an area for which littlelocal knowledge exists (e.g. solar electricitygeneration for lighting), a specialist will berequired who can provide key parametersconcerning cost and performance, so as to avoidextensive work on a proposal that is clearlytechnically infeasible from the start.

Module 3 – Detailed Formulation andEvaluation

The second phase of RuralInvest consists ofpreparing a more detailed project proposal, usingthe Module 2 profile as the starting point.Participants in this phase may include not onlythe applicants and the local technician(community promoter, extensionist, etc.), butalso a regional technician, trained in the use ofthe computerized RuralInvest models for projectformulation and analysis. It is possible that thelocal technician assumes this function. Generallyspeaking however, the two roles are sufficientlydifferent that a separation of responsibilities isrequired.

In the detailed project preparation stageadditional external technical input may also berequired, depending on the investment value andits complexity. 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, inline with the value of the investment proposed.

The depth and level of detail required in theprocess of formulation and evaluation will dependon the complexity and the scope of the project.The regional technician will provide support to theapplicants and to the local technician in some orall of the following tasks:

c Determination of demand and benefits;

c Evaluation of the proposal’s technicalfeasibility and scale;


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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 evaluationrequires the use of a computer and is not generallycarried out in the field. For this reason it isessential that contact be maintained between theresponsible technician and the applicant(s) toinsure that the proposal truly reflects their needs.Furthermore, it may be that the detailedformulation reveals aspects of the investment thatrequire the applicants to reconsider their plans (forexample, competition for labour at key periods ofthe year, or high maintenance costs).

Depending on the degree of complexity of theproject, it is estimated that the detailed evaluationwill require between two and four weeks per profileand will call for several visits to the field by thetechnician working with the computer software.

Module 4 – Monitoring and Evaluation ofProjects

Many institutions or internationally-financed projectsadopting Ruralinvest support the preparation andfinancing of scores, or even hundreds, of ruralinvestments. Furthermore, the process of identifyingand preparing these investments is often undertakenin a number of local offices spread throughout thearea covered. In these circumstances, adequatelymonitoring and evaluating the proposals receivedcan be a difficult task.

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 is possible to usethe built-in search engine function in the software toidentify all projects stored in that computer whichmeet selected criteria. These criteria can define thelocation or status of the project, its type, beneficiaryor environmental category or the technician whoprepared it. Key financial indicators can also beselected for, such as internal rate of return, netpresent value, total investment cost or the use ofdonated resources. For example, by selecting theindicators ‘northern field office’, ‘beneficiary groupwomen’ and ‘small livestock’, a table would begenerated that showed all projects meeting thesecriteria and their key characteristics.

Monitoring Data on Project Performance

Proposals and subsequent projects prepared usingRuralInvest can also be labelled according to oneof the following stages in the project cycle:

c Proposal

c Approved for financing

c Investment

c Operation

The indicators described above can then be usedto classify projects at different stages in the projectcycle. Furthermore, by entering new data intoprojects as they move from one project stage tothe next, 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.Experience has shown that RuralInvest is thusmost applicable in contexts such as:

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


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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 biodiversityprotection program or one aimed at thereducing the impact of natural disasters,such as are supported by the GlobalEnvironment facility (GEF) and otheragencies.

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

c In the ex-post evaluation by Governmentsand international agencies of the impactand profitability of rural investments oncethey have 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 thekey positions of local technician and of regionaltechnician:

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.

Regional or Support Technician

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

c Basic knowledge of rural productionsystems.

c Prior experience in the use of computersand MS Windows.

c Familiarity with the basic financial concepts.

c Participation in the first training course forfield technicians.



Chapter II

THE DETAILED FORMULATION ANDEVALUATION PHASE


10

repairs and machinery replacement and thepossibility of alternate technologies is alsoconsidered.

3. Sustainability and environmental impact:This task considers the sustainability of theproject not only from the perspective ofnatural resource usage and environmentalimpact. It is also critical for those projects notgenerating substantial income streams,where there is a need for operational supportonce the investment is completed: a school isnot sustainable if there is no provision forpaying the teacher’s salary. For investmentswith the likelihood of a negativeenvironmental impact, impact mitigationmeasures, or ways to modify the projectdesign to avoid these impacts, must beidentified.

4. Estimation of costs and income:The next step is to define and calculate thecosts and income associated with theinvestment and operation of the project.Although this may be a relatively easy stepfor simple investments, the introduction ofvariables such as perennial crops, livestockbreeding or other complex activities cancreate significant complications.

5. Financing the investment:With costs and income calculated, thefinancing needs can be considered, both forinvestments and for the working capitalneeded for daily operations.

6. Organization and investmentmanagement:The most profitable project will fail if it lacks anadequate structure for directing andmanaging operations. The identification ofthese management needs is an integralelement in the formulation and evaluationeffort.

7. Evaluation and preparation ofrecommendations:With all the individual elements offormulation and evaluation gathered, the fullproject evaluation can be undertaken.However, the results obtained only tell part ofthe story. It is also necessary to identify thekey factors that will influence the eventualsuccess of the investment and to determinethe risk that these factors may differ fromthose foreseen in the project design,affecting the success of the project.

8. Preparation for the investment:Aspects to be considered here are: taskscheduling, negotiations with the financingsources, supervision of construction and otheractivities essential to the execution of theproject.

II THE DETAILEDFORMULATION ANDEVALUATION PHASE

This guide provides a detailed description of themethodology and procedures involved in the

third phase of RuralInvest; that is, the phase offormulation and evaluation of detailed projects.Two prior modules exist offering similar supportfor the tasks of diagnosis and identification(Module 1) and the preparation of project profiles(Module 2). Each module is provided with atechnical manual and an instructor’s guide.

Normally, it is recommended that formulationand evaluation be carried out only after thecorresponding Module 1 and 2 field work hasbeen completed. However, Phase I(corresponding to Module I) may not always benecessary, and where the proposal is derived froma single family or individual, or in those caseswhere it is clear that the proposal represents thewishes and priorities of the applicants, it may bepossible commence with Module 2.

The manual also highlights the importance ofsupporting the process that follows formulationand evaluation. Even once the financial committeeof the supporting agency has approved theinvestment proposal, there remain manychallenges to be faced by the applicants beforethey can initiate the project. It is hoped that theseneeds will be considered in greater detail in aproposed latter manual, which is to focus on theexecution of small rural projects.

A. Main Elements of Formulation andEvaluation

The formulation and evaluation phase comprisesseven main elements, described below:

1. Estimation of demand and benefits: Thistask determines the potential benefits thatresult from the investment. In projects thatgenerate saleable products, the size andnature of market demand is estimated. In thecase of non-income generating projects, thebeneficiaries must be identified and theimpact of the investment on thosebeneficiaries estimated. In both cases, theexercise helps define the scope of theinvestment and its characteristics.

2. Evaluation of the technology: Theproposed technology is reviewed in light ofthe results of the evaluation of demand andbenefits, in order to ensure that it isappropriate. The need for maintenance,


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B. Software Scope and Requirements

Given the custom software developed forRuralInvest, it is not necessary for users to becomputer experts. However, access to a relativelymodern computer and some level of familiaritywith the Microsoft Windows operating system areindispensable. The use of a computer with aminimum of Microsoft Windows 95 (or laterversion) is recommended whenever possible.

Two principal types of operations are permitted bythe software, the entry of project profiles(prepared in the field during Phase II) and theformulation of detailed project proposals.Electronic versions of the profiles can be used formanagement information purposes and can besorted by key characteristics. They can also passbasic information automatically to the screensused for detailed formulation.

The detailed formulation option within thesoftware permits automatic calculation of many ofthe steps necessary in the determination of projectfeasibility. Different screens exist for incomegenerating and non-income generatinginvestments. Once all required screens have beencompleted the software can generate projectsummaries or full project descriptions of between8-25 pages, depending on the scale andcomplexity of the project. Information can also bepassed from a computer in a local office or agencyto a central headquarters, where projectsprepared by different technicians can be groupedtogether. It is hoped that there will shortly besupplementary software available to permit theManagement Information Systems (MIS)department of a Ministry, bank or large project tooutput detailed breakdowns of rural investmentproposals by location and type of investment.

Finally, by subsequently replacing data used in theproject models with real data once projects are inimplementation, RuralInvest permits users to seeclearly the differences between the project asenvisaged when in preparation, and the project asit occurred in the real world. This comparison canbe invaluable in helping to identify weaknesses inthe project formulation process, and showingwhere more conservative assumptions or moredetailed analysis, are necessary.

The computer software currently used byRuralInvest is largely developed in Microsoft VisualBasic with database functions derived from MSAccess, and conforms to the structure used for theMS Windows Explorer package, which is found inall Windows desktops. While Windows is essentialto run the RuralInvest package, there is no needfor the user to have MS Access on his or hercomputer, as the package is self-executing (that isto say it carries its own programming code). AUser’s Manual provides additional support for the

software, but the menu-driven structure and on-screen help renders the software easy to use oncethe underlying concepts have been understood(the key role of the training course).

The software offers two levels of entry, includinguser and administrator. Those with administrator-level access can modify a number of data entryparameters and output screens to meet thespecific conditions of the country or institutionsupporting RuralInvest. For example, it is possibleto define default currencies, administrative levels(e.g. municipalities, districts, provinces, states,etc.), regional or local offices, and projectcategories. It is also possible to set defaults for thefinancing aspects related to the investments, suchas minimum and maximum duration of loans, theavailability of grace periods, interest rates etc.

C. A Brief Warning

RuralInvest cannot work miracles. The quality andvalue of the final proposal generated as a result ofusing RuralInvest depends, to a large extent, onthe care and thoroughness with which thedifferent stages of analysis have been completed.Poor information entered will result in poor resultsgenerated at the end of the process.

In some cases, specialized information is neededto determine such aspects as marketcharacteristics, probable yields or the suitability ofthe zone for the proposed crop or product. It istherefore recommended that when a proposaldeals with a matter involving information thatgoes beyond the knowledge or capability of thegroup and its advisor (for example, determining ifthe flow of a stream is sufficient to support anirrigation system of a determined size), theopinion and support of experts in the particularfield should be sought. Organizations andagencies using RuralInvest should make allowancefor the cost of such supplemental technical inputand it can be vital for project integrity.

Of even greater importance is the treatment ofmuch more common figures: yields, prices andcosts. The computer software used in RuralInvesthas only a very limited ability to identify and rejectincorrect or over-optimistic numbers. Anyproposal can appear attractive if the technicianinserts very optimistic numbers into theformulation process and if she/he fails to give thenecessary importance to such integral evaluationsas marketing, technology, sustainability,management, etc., and treats them asunimportant tasks to be completed as quickly aspossible. If the technician states that cheese fromthe dairy plant will sell for US$2.50/kilo when arealistic price is closer to US$1.25, the result islikely to be an apparently attractive project that


12

fails once it is put into effect. For this reason it isvery important: (a) to not inflate figures togenerate positive outcomes, simply because thefirst numbers used did not give the desired result,and; (b) identify those elements which are mostlikely to affect the overall feasibility of the project(yields, prices etc.) and use the power of thecomputer to run the model various times underdifferent assumptions. This will soon show which

changes could result in a failure of the project (thisis discussed in more detail in Chapter 8 of thismanual).

Remember: The recommendations that youpresent to the financing agency may have aprofound impact on the lives of the applicants. Ifyou fail to do your job properly, many lives can beadversely affected.


Chapter III

ESTIMATING DEMANDAND BENEFITS


14

money generated to continue operations andcover the cost of the investment.

The evaluation of demand (existing or potential)for a proposed product or service must thereforebe the first step in determining whether aninvestment is feasible or not.

The evaluation of demand not only determinesthe general feasibility of the investment andoften the scale of output, it may also have animportant impact on the characteristics of theproduct to be generated, the technologyapplied; the inputs that can be used (forexample, certain types of agrochemicals); andthe scheduling of activities. Consequently, anyinvestment proposal that fails to present anexplicit examination of the market is, bydefinition, inadequate.

The tasks involved in evaluating market demandvary, depending on the type of product or serviceunder consideration. Four main categories ofgoods and services can be identified, each ofwhich has its own features, and requires adifferent approach to demand evaluation. Thesecategories are:

a) Basic non-perishable products

b) Basic perishable products

c) Innovative or specialized products

d) Services.

Each of these categories is discussed in more detailbelow:

1. Basic Non-perishable Products

This is the simplest category of products in termsof evaluation. The key characteristics of basic non-perishable products are as follows:

a) They have well established and developedmarkets with multiple points of sale andpurchase. That is to say, it is easy to find bothbuyers and sellers, and there are standardprices – often publicly available – for theproducts.

b) They suffer no rapid deterioration in qualityafter harvest or production, and thus anyproduct not sold today may be soldtomorrow with little or no loss of quality. Asa result, storage is relatively easy and pricesnormally change only slowly from month tomonth.

c) Price variations within a single marketgenerally reflect widely recognizedcharacteristics of the product (size, colour,variety, quality, etc.) and there is little or nodistinction made as to the source of theproducts. Specific, sometimes legally-

III ESTIMATING DEMANDAND BENEFITS

The starting point for assessing any projectmust be the identification of demand and

benefits. An understanding of these factors iscritical because they determine whether theinvestment will be of value – either becausepeople want to buy the output, in the case ofincome generating projects, or because theinvestment contributes to the quality of their lives,in the case of social, environmental and supportprojects. In particular, the level of demanddefines the scale of the investment (andconsequently, the volume of production and theoperating costs), as well as many othercharacteristics (e.g. technology, ingredients,seasonality) that will be discussed in more detaillater.

The method of estimating demand will varyaccording to the product or service being offered.The simplest case is that of non-perishableproducts with widespread demand (such as rice,wheat and maize), but we will also look atdetermining the demand for perishable,specialized or innovative products, as well as forservices. We will also briefly address the costsassociated with marketing the good or serviceproduced.

Even projects that do not result in saleable goodsor services are still dependent on demand. What isthe purpose of constructing a school if there areno children to fill it? Demand may not beexpressed in money terms, as it would be for a kiloof cheese, or a shirt, but it definitely must exist. Insuch cases the challenge is to identify who theusers or beneficiaries might be, and whatalternatives they have. Sometimes it may even benecessary to estimate the value of the benefits thatusers receive.

A. Estimating Demand in the Presenceof Markets

The market is critical for any investment that ismade with the intention of generating incomeand profits. Where a product or service is to besold, the amount that people will buy is themeasure of demand for that product. No incomegenerating project can sustain itself if it fails torespond to the demands of the market. Thismeans that when producing a product or serviceand delivering it to the buyer, the project mustfulfil the characteristics that the buyers are lookingfor, in terms of volume, price, packaging, quality,and seasonality of supply, among other factors. Ifthis is done, the product or service will be sold and


15

established grades often exist that render iteasy to see how quality and othercharacteristics affect prices: for example, nomore than 5% broken grains.

Although the concept of "non-perishable" dependson the length of time being considered, this groupcan include: grains, roots and legumes; many ofthe traditional export products (coffee, cocoa,sugar, cotton, etc.); and some manufacturedproducts, where there is little difference from onesource to another, such as simple tools andagricultural inputs or construction materials(blocks, roofing tiles, etc.). Live animals may alsobe counted in this category, as there are generallywell developed markets for poultry, pigs and cattle,and they are not perishable, in the sense of losingquality from one day to another.

The factors that characterize this category carrythree important implications: (i) the market canabsorb as much as a small or medium project iscapable of producing, and therefore there is noconcern about the scale of the investment from amarket point of view; (ii) the price of the productis easy to ascertain and will not be influenced bythe activities of the project; and (iii) thespecifications of the product are generally wellestablished (for example, the percentage ofhumidity in grain, or the size of a building block).

The only exception to this last rule is if a projectdecides intentionally to offer a basic productunder new specifications (for example aconstruction block of a new size). However, theproduct would then no longer fit in this category,but would have to be analysed as an innovative orspecialized product (see section below).

Market evaluations for basic non-perishableproducts are among the simplest to perform. Anyconcerns about the market would probably focuson price trends over the next few years, aschanges in national or even internationalproduction, tariff barriers and technologies mayresult in substantial price shifts in the future.However, forecasts for future prices can frequentlybe found in publications, bulletins or the databases of national public institutions orinternational agencies.

Although the market evaluation is typically verysimple, it is still necessary to keep certain keypoints in mind, especially when dealing withprocessed foodstuffs;

c The selected price should be justified in thecontext of medium range tendencies, ratherthan based on its price during the week inwhich the market evaluation was carried out.

c Make certain that there is a clearunderstanding of the characteristics that themarket demands of the product; a small

difference in size, colour or humiditycontent can render a product unattractiveto potential buyers. Remember: When thereis not much difference between products, itdoesn’t take a very important fault to leadthe buyer to choose a different one.

c If retail outlets, supermarkets or other sellersare going to be used to sell the product,don’t forget the margin they charge fortheir service. Jewellery is frequently sold atmargins of up to 100% or more and evenfood products can expect margins of 30 to50%. Identify your distributors as part of themarket evaluation if possible, and negotiatemargins ahead of time.

2. Basic Perishable Products

Although basic perishable products also face wellestablished markets with many buyers and sellers,they differ from the previous category in one keyaspect; the product loses quality rapidly over time.And what a difference that makes to demandevaluation! A market evaluation for perishableproducts faces problems that are very differentfrom those of non-perishable products. Due to thefact that perishable products are delicate and havea short life once harvested or produced, theirmarkets (although typically widespread andactive) are often characterized by variable suppliesand strong price fluctuations. Such conditionsmake it very easy to over- estimate the potentialincome from the sale of these products.

Among the products found in this category are mostfresh vegetables and fruits, fresh seafood, cut flowersand some processed and semi-processed foodstuffssuch as bakery goods, fresh juice, milk, etc.

Some of the most important factors that arefrequently overlooked in the market evaluation ofperishable products are:

a) Losses suffered by the product duringharvest, packing, transportation, andmarketing can be appreciable. In some casesit is possible to end up selling less than 50%of the volume produced, and losses of 25 to30% are not uncommon.

b) It is also common to find that the price in oneweek can be double (or half) the price of theprevious week. For perishable products it ispossible that the price changes in the courseof a single day. These fluctuations can resultfrom changes in demand, but are mostfrequently the product of changes in supply.If the product is delivered to market whensupply is tight prices may be very high. Bycontrast, delivering to market when theproduct is abundant may yield only very lowprices.


16

c) Unlike grain or roofing tiles, it is often difficultto keep a perishable product from one day tothe next; in the extreme cases, a product thatis not sold by the end of the day or week maynot only loose all of its value, but also causeadditional costs for garbage collection.

It is not surprising, then, that fluctuations insupply and price have a strong influence on thesuccess or failure of a project that generates aperishable product. The extreme variability thataffects the prices of perishable products demandsexceptional care in estimating the average saleprice (see the example presented in the box).

We recommend that when evaluating the marketfor perishable products, the following factors begiven serious consideration:

c Relatively small quantities of perishableproducts can cause large fluctuations in theprices, especially in small markets. Talk tosellers and other market participants todetermine the volumes passing throughyour selected market and the seasonality ofsupply. If your product would addsignificantly to these volumes, consider thefeasibility of delivery at periods of shortsupply, or try and supply to more than onemarket.

c High prices can result from unexpectedshort-term conditions; check the pricehistory over several years, if possible.Remember; high prices often attract otherinvestors, resulting in more production andlower prices in the future.

c Be realistic about the physical losses thatmight be encountered. If the product isdelicate, a minimum of 20–30% should beassumed, unless experience shows a way toreduce this figure. Sturdy products mightsuffer loses of 10-15%.

c Perishable products that are produced yearround, such as eggs, milk and bread tend tosuffer less price instability because supply isfairly constant. Even so, demand may vary,causing losses at the end of a day if thereare too few buyers.

Consider the possibility of negotiating fixedcontracts with consumers (agroindustries,restaurants, hospitals, etc.), who offer a guaranteedmarket, even if you have to accept a lower price.

3. Innovative or Specialized Products

In the two previous sections we considered thedifferences between perishable products and non-perishable products. But in both cases we dealtwith standard products where, from the

consumer’s point of view, there is not muchdifference between the outputs of farm or plant"X" compared with that of farm or plant "Y".However, when dealing with innovative orspecialized products, the situation changesdrastically.

Innovative products (by definition) have noexisting market price, as they are new, but it may

The world is full of failed tomato productionprojects. Why? Because whenever anyonemakes a calculation of its profitability, thetomato shines forth as fabulously profitable.Enormous earnings await those who are willingto invest in establishing just a few hectares ofthis golden vine.

Look, say the investors, the Ministry ofAgriculture assures us that we can easily obtainyields of 6.5 tons of tomatoes per hectare, at acost of no more than $2,750/ha. Last year, theprice of tomatoes in the local market frequentlysurpassed $1.50/kg. Sometimes it got as highas $2.50! Taking the conservative figure of$1.50 would mean an income of $9,750/ha. or$7,000 profit after costs for every hectare. Wecan invest $50,000 in an irrigation system, asmall building for selection and packing, andthe equipment needed for cultivating 5 ha ofland. We will make $35,000 in profits in thefirst year and we will have paid off the loan inless than two years. What an opportunity!!!!

The reality, however, turns out to be a littledifferent. Luckily, there are no serious pest orinsect problems in the first year, and theinvestors manage to harvest 6.25 tons/ha; closeto the promised yield. But they lose 8% of thecrop in the selection and packing stage, andanother 15% in transporting the tomatoes tothe closest market. With a supply of 24 tonsbeing harvested in a period of just a few weeks,the local market is flooded with tomatoes. Afterwatching the initial price drop from $1.80 to$0.50/kg. and still having unsold tomatoes atthe end of the day, they decide to contracttransportation at a cost of $0.40/kg to take theremaining tomatoes to the regional market.There the price is a little better, but they still getno more than $1.20/kg. and they sufferanother 10% losses thanks to the poorcondition of the road.

In the end, the investors managed to sell anaverage of only 4 tons/ha at an average price of$0.60/kg (after transport costs). Their totalincome from each hectare has fallen to $2,400.They are loosing $350 per every hectareplanted. What a disaster!!!!

THE SEDUCTIVE TOMATO


17

be possible to determine likely prices by looking atthe price of competing products, or by looking atthe price relationship in markets where theproduct does exist. An exotic fruit, for example,might be unknown in your market, but be sold ata price slightly more than an apple in the capitalcity. A word of caution here: If the product isknown elsewhere, but not sold in your localmarket(s), ask yourself - why not? You may havehit upon an unexploited market opportunity, butmaybe not. It may be instead that the buyers inyour area simply do not have the income to affordsuch a product, or that it does not fit easily withthe food and eating habits of the area.

Specialized products might include products withlimited sales (where there are not manycompetitors because of the small size of themarket), or they could be products with quitesubstantial markets, but where – in contrast tobasic products - the buyers see importantdifferences in taste, quality, or durability betweenthe competing products. Specialized productscould take the form of a jam, a shirt or even a car.

If you manufacture a car, you cannot simplysuppose that you can put the same price on it ason a Toyota, and sell as many as you want. In factit could be that you don’t sell many even at halfthe price of a Toyota, because, as far as theconsumer is concerned, your car and the Toyotaare not the same.

This characteristic means that the marketevaluation must not only determine the level ofdemand, the price and the seasonal sensitivity ofthe product (as in the case of basic products), butalso the nature of the product that is in demand.The market defines the product.

A shirt can have long or short sleeves, it can bewhite, blue or yellow, and it can have four or sixbuttons. In other words, every shirt is different,and a buyer looking for a formal shirt may not buya sports shirt.

Products that will likely fall into the category ofspecialized products include: handicrafts (wooden,cloth or ceramic articles etc.); clothing; many

The importance of packaging to a processed product can be illustrated by these true stories of waysin which the packaging affected the fortunes of a food product.

The PrincessA group of women in Guatemala were using an abundant local supply of pears to prepare juice,packaging it in small "easy-open" cans, each with enough juice for one person. But the product hadto compete with a range of juices from a large national processor already well established in themarket. Sales of the local product were poor. Finally, the women decided that their problem arosefrom not offering a wide enough range of flavours. With the help of an NGO, they brought in fruitfrom other regions to process and thus increase the range of their products. But their problems onlygot worse; now they had cans of pear, pineapple and mango juice that would not sell. What to do?

Their real problem was the cost of the packaging. The fancy cans made up 80% of the totalproduction cost, and their initial advantage - access to local fruits at low costs – was completely lost.They simply couldn’t compete with the low-cost paper "tetrapaks" used by the large corporation. Thesolution lay in using a package more suited to the local market. Plastic bags, such as those used formilk and cream, allowed the group to sell larger quantities at reduced prices and thereby meet thedemand of lower income buyers in the area.

The CinderellaA small fruit processing plant in the Caribbean had a problem. It was hand making a guava jelly andselling it in simple glass jars in the local supermarket at $0.99 each. Unfortunately, Kraft Foods alsohad a guava jelly, and was offering it at the same price. Thanks to its famous trademark, Kraftmanaged to capture the lion’s share of the market, and the local plant couldn’t sell enough of theproduct to cover its costs. What to do?

A closer examination revealed that the fruit used by the processing plant came from a wild guavaforest in the middle of the island. The trees had never been sprayed with chemicals or received anyfertilizers. Here was an opportunity - but only if the product could be presented in the right way. Withthe help of a designer, the cheap packaging was replaced with an octagonal glass jar complete withsatin ribbon and an elegant label. Instead of "Guava Jelly" the label now read "Sea Island Wild GuavaPreserve. Hand-made with 100% organic wild tropical fruit." The newly packaged jelly was soldthrough a chain of luxury stores in the USA at over $4.00 each, and the plant received enough perjar to cover the additional cost of the packaging and to increase its profit margin. Now its problembecame finding enough raw material to fill its demand!

A TALE OF TWO PACKAGES


18

processed foodstuffs (but not all; few consumersmay readily distinguish between competing brandsof milk); many fruits, vegetables and exoticproducts; and any innovative product (for example,construction materials, furniture, etc.)

Unless you are lucky enough to find a person withconsiderable experience in marketing the productin question, it might be necessary to carry outsome sort of a market study:

c What is the characteristic of the productthat will attract the attention of theconsumer? Could it be the price, the quality,the origin, or an element of novelty in itsappearance or content? Regardless, everyproduct must offer something for theconsumer and the first step in the marketevaluation must be to identify thatcharacteristic.

c What kind of person or client will be mostlikely to buy this product? If it is somethingout of the ordinary (an exotic fruit orvegetable), perhaps a luxury restaurantwould be interested. But in this case itmight not be advisable to offer the productin a poor neighbourhood.

c What marketing channel will be used? If theplan is to sell the product through a store,supermarket or other salesperson, you mustbe sure that they will accept the productand you must determine the profit marginthey will charge. If you intend to sell theproduct directly, in a market or fair, youmust identify the most adequate point ofsale, based on the target consumer.

Keep in mind:

c In the case of processed products, thepackaging is critical. However, even thoughthe market demands attractive packaging,remember that what you are selling is the

product, not the package. Therefore, makesure the packaging used is appropriate forthe market.

c Generally, processed foodstuffs must complywith legal standards regarding labels (list ofingredients, health permit numbers, etc.).Establish those requisites as part of a marketevaluation.

On the previous page two brief stories arepresented (see box) that illustrate the importanceof appropriate packaging for each product.

4. Services

The evaluation of demand and marketcharacteristics for services raises issues that arequite different from for products. Services arecrucially characterized by the transitory nature oftheir supply. A hotel that only fills 60 of its 100rooms on one night cannot recuperate its losseson the next night by offering 140 rooms.

Each time a service is offered and there is nobuyer, that income is lost forever. The same,however, cannot be said for the costs. Normally, aservice company will incur costs whether there areclients or not (although costs may be higher whenthere is work).

As a result, the critical element in the evaluation ofthe market for a service consists in establishing thepattern of demand for services over the span of ayear (or other period). Although some services(e.g. well digging or transportation) may have amore balanced demand pattern than others (i.e.hotels, agricultural services), it is not sufficient toassume a constant demand for any service, everyweek or month of the year. In the followingexample, it can be seen that the demand for theservices of a tractor varies greatly according to theagricultural cycle; of an estimated 50 hours permonth in January, April, September and October,

Jan

50

10

500

Feb

190

20

3800

Mar

190

20

3800

Apr

50

10

500

May

90

15

1350

Jun

90

15

1350

Jul

160

20

3200

Aug

160

20

3200

Sept

50

10

500

Oct

50

10

500

Nov

85

15

1275

Dic

85

15

1275

Land Prepn.1st Cycle

Harvest2nd Cycle

Land Prepn.2nd Cycle

Harvest1st Cycle

Estimate of Annual Use of Tractor Services (Hours / Month)

Hours/Month

Rate/Hour

Income/Month

Annual total (Hours): 1250 Annual total (Income): 21250


19

to 190 in February and March, when preparationof the fields is in full swing.

If you anticipate that the demand is going to varygreatly, there are several available options: One isto charge a variable price for the service, topromote the volume in periods of low demand.Hotels, for example, frequently charge reducedrates for rooms during the "off" season comparedwith "high" season rates. In the example shown, acontractor selling tractor service offers three rates:$10/hour during the slackest period; $15/hourduring the harvest; and $20/hr during the soilpreparation period, when the demand isstrongest. Remember: once the day (or night) haspassed, the available service is worth nothing; theopportunity is gone.

5. Marketing Costs

Finally, it is important to bear in mind, as part ofthe market evaluation, the costs associated withthe selling process. As we saw in the tomatoexample, these costs can have an importantimpact on an operation.

Among the types of costs to be considered are:

c The cost of packaging the product,including: the container (bag, bottle, jar,box, etc.); the label, and materials forprotection during transportation (e.g.cartons for tins, wooden boxes for glassjars);

c Transportation costs from the point ofproduction to the point of sale;

c Costs of distribution and representation(when the product is sold through adistributor or agent);

c The sales margin of the store or other pointof sale (when using the final retail price asyour base for calculation);

It is useful to remember that some sellers mayinsist on a policy of "sell or return" or sale onconsignment, in which they only pay theproducer when the product has actually beensold. This method is very common withhandicrafts, such as paintings, jewellery or otherworks of art. It is also frequently used with newproducts, when the seller cannot easily calculatethe level of demand. It is not a very attractivearrangement for the producer, but it may be theonly way to begin the marketing process.Nevertheless, remember: products deliveredunder this system are not yet sold, and you haveto be careful when starting a new round ofproduction, based on these deliveries; they mightend up being returned by the store.

B. Estimating Demand in the Absenceof a Market

We have seen in the preceding section that thereliable determination of demand levels and pricescan be difficult. However, in the absence ofmarkets for the products generated by theinvestment, the estimation of the demand is evenmore complex. When a product is sold, you cansay that the buyers of that product are its clientsor beneficiaries, and the demand corresponds tothe number of products sold to them. Of evengreater importance is that it may be assumed thatthe market will give a clear indication of the valueof the product, thereby facilitating the estimationof benefits2. But if the product is something likethe protection of an ecosystem or a campaign forvaccinating children, then who are thebeneficiaries? What is the level of demand? Whatvalue can be assigned to the products or servicesgenerated?

This problem is encountered by everyone whodesigns and finances investment projects whichgenerate benefits without direct consumermarkets, such as roads, health care centres,reforestation, etc. Many documents on the subjecthave been written, proposing complexmethodologies for resolving these questions.

Of course, when we are dealing with US$10,000or US$100,000 projects we cannot go into thesame detail as for a project aimed at rehabilitatingthe national healthcare system, with a budget thatmay well exceed US$100 million. But, even whenpreparing small projects, it is necessary at theminimum, to determine and estimate the level ofdemand and benefits expected from theinvestment.

1. Who are the beneficiaries and how manyof them are there?

Before considering the level of demand, it isnecessary to first determine who the beneficiariesare. In some cases the answer can be clear; thebeneficiaries of a healthcare centre are those whogo there to seek medical attention. But it is notnecessarily that easy. Should we exclude thepeople that live in the zone but have no need forthe services in a given year? Perhaps they arebeneficiaries, simply because they enjoy theavailability of the facilities, even though they havenot had recent occasion to use them.

Experience has shown that when a rural accessroad is constructed or improved, one of thegreatest resulting impacts is an increase inagricultural production. In addition to facilitatingthe transportation of products to markets outsidethe zone, a road also allows for delivering input

2 In reality there are many factors that can distort the price paid in the market for the products, such as taxes, quotas, etc.


20

materials, and for the access of extensionpersonnel to the zone. It may also help children toreach schools and the sick to reach medical care.Thus the beneficiaries are by no means restrictedsimply to those who drive the trucks and buses onthe road; the most important beneficiaries arerather those who live and work nearby.

In some cases, it can be argued that the wholecountry, and indeed the entire world can beconsidered as a beneficiary. This is the logic thatsupports a new type of project, in which richcountries that generate vast quantities of carbongases (coming from factories and other industrialactivities), pay less developed countries to protectand increase their forested areas, where thosegases are converted to wood and other organicmaterials by the trees and other vegetation. In thisway the beneficiaries of these projects includepeople who live in distant continents.

Such great impacts are not to be expected from asmall project. However, projects involvinginfrastructure and conservation of naturalresources frequently benefit people living outsidethe zone. For example, a project for the protectionand conservation of mangrove swamps maybenefit the shrimp producers (because shrimplarvae live in mangrove swamps), the tourismsector (because mangrove swamps house aplethora of wildlife), and the agriculturalproducers of the region (because the mangroveswamps act as a buffer zone to protect agriculturalzones from storms, erosion etc.).

In order to overcome the problem of direct andindirect beneficiaries, and at the same time, keepthe procedures for preparing proposals simple,the RuralInvest methodology requests an estimateof two numbers for projects without directmarkets for its products.

First, you should estimate the number of personsthat will benefit directly from the project. Thisincludes both employees (e.g. school teachers,nurses in clinics, park rangers, maintenancepersonnel, etc.), as well as clients and other directusers (patients, school children, vehicle drivers).

Determining this figure for an, as yet, unrealisedinvestment may be difficult. It is often necessary tolearn from the experience of others. For example,it may be that you have no idea of the number ofpatients that might be expected in a newcommunity clinic. However you can find out theprior experience of other clinics of similar size(speaking with staff of Health Ministries or NGOsthat deal with these types of activities).

Secondly, you should estimate the number ofpersons indirectly affected by the investment. Inits most simple form, this task consists ofcalculating the population within a determineddistance (e.g. 5 km.) from the site of the

investment. This method probably is the mostappropriate for clinics, roads, electrification, etc.But remember, there is no logic in saying that theentire population of a Province or Department isan indirect beneficiary of a small healthcarecentre in the care of a single nurse. In the case ofworks such as the protection of a river basin ormountainside, you should attempt to estimatethe number of inhabitants that may be affectedby the investment, either down river or within thevalley, etc.

2. Estimating the Value of the Benefits

Once the population of indirect and directbeneficiaries has been established, the nextchallenge is to quantify the impact; that is,determine the value of the benefits that will result.It is important to understand that the type anddegree of benefit will never be the same for allusers. People living near the project site mayreceive greater benefit than others. By the sametoken, the example of mangrove swampprotection shows us clearly, that the benefitsenjoyed by different types of users - shrimpfishermen, the tourist sector and farmers - can alsobe very different.

Although there are exceptions, the problemsinvolved in quantifying benefits (e.g. the value ofeducation, or medical treatment that saves the lifeof a person) are generally far too complex to beattempted in the evaluation of a small project.However, there are cases where it is possible tooffer an approximation (see the example in thebox presented at the end of this section),especially if there are comparative data from otherinvestments, or some group or agency that hasconducted a recent study on the subject.

The difficulties in calculating a precise value forthe benefits do not justify forgetting about them.It is very important to provide the financingagency with some description of the nature andmagnitude of the expected benefits. In theabsence of this analysis, it is highly possible thatthe agency will choose to finance an alternativeproposal in which the applicants give a betterexplanation of the expected benefits.

3. Other Considerations

Any calculation of benefits assumes that theinvestment continue to function long enough togenerate these benefits. This is where theimportance of considering maintenance needsand costs comes in. This subject is discussed ingreater detail in Chapters 5.H and 6.A.

It is also important to remember that there maybe benefits, simply from the fact that theinvestment was made, in terms of jobs created in


21

its construction or preparation. If the investmentgenerated a number of jobs during this period, itis important to indicate this benefit clearly in theproposal document.

The north of Ghana, in West Africa, is almostcompletely separated from the south of thecountry by the largest artificial lake in theworld. Some years ago, the only available routeto the South was a single bridge. A ferry servicehad previously operated, but silting had left thedocks far from the water and, in any case, itcould carry few vehicles. The approach rampsto the bridge were deteriorating rapidly, andthe highway engineer from the zone predictedthat unless there was investment in theirreconstruction, the bridge would becomeimpassable by the end of the next rainy season.

The cost of the investment to rebuild the bridgeapproaches was quite small, but how tomeasure the benefits? By counting trafficvolumes, and talking with drivers to determineseasonal variation in traffic flows, an estimatecould be made of the number of direct users.Given the lack of alternate routes, the numberof indirect beneficiaries could be estimated as amajor portion of the population of the northernpart of the country. But what would be thevalue of the benefit that they would receive?

If the bridge became unusable, most buses andtrucks would have no alternative but to travelup through one of the neighbouring countriesand then cross back into Ghana in the extremenorth of the country (there was no passableborder crossing for much of the northern half ofthe country). This route would add severalhundred kilometres to the distance travelled pervehicle. Without even considering the cost ofpassing through two sets of customs (onleaving the country and re-entering), and onlytaking the per kilometre operating cost ofvehicles, the total additional transport costwithout the bridge, and therefore the value ofthe benefits, could be calculated. Even if it wasassumed that some vehicles could use theferries, the benefits would only decreasemarginally.

Of course a calculation of this type is vulnerableto many errors. It is no more than anapproximation. No account has been taken ofother losses, such as reduced sales ofagricultural products, or increased travel timesfor passengers. And the reality is that suppliesfrom the South might well be partly substitutedby products brought in from neighbouringcountries. The key principal, however, is todemonstrate that the benefits, although lackingprecision, would without doubt far outweighthe cost of the investment.

SMALL INVESTMENT,LARGE BENEFIT



Chapter IV

EVALUATION AND SELECTION OFTECHNOLOGY


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IV EVALUATION ANDSELECTION OFTECHNOLOGY

The idea for an investment project rarely startswith the technology to be applied. Instead the

investor normally takes as a starting point theavailability of some resource or the identificationof a good market opportunity. In the case of non-profit generating investments, the justification ofthe project almost always lies in the response to asocial or community need.

However, once the market evaluation (or theutility of the benefits in the case of social orproduction support projects) has been adequatelycompleted, it is necessary to consider thetechnology to be used.

The use of the word "technology" does notnormally imply investment in advanced and costlyequipment. To the contrary, most of theinvestments considered in this manual use onlysimple machinery. In fact, it is not uncommon inthe case of agricultural projects, for theinvestment to be inferior to the need for workingcapital.

A. Reconfirmation of theScale of the Project

In preparing the detailed project, the appliants,together with the local technician, must make aseries of assumptions about the scale of theinvestment. A first step, therefore, is to reconfirmand, if necessary, make adjustments in the scale ofproduction proposed in the initial profile. This inturn, normally requires the results of the demandanalysis discussed in Chapter 3. The analysis of themarket (or the demand for projects withoutmarket for their products) should indicate whetherthe scale originally proposed is realistic, in terms ofthe demand and the prices.

The amount of resources that are available alsomay be relevant in establishing the scale ofproduction. Although the applicants are usuallyconscious of the limits set by the availability ofland, they frequently forget to take intoconsideration the equally important need forwater - for example, in irrigation projects.

Another basic resource that is often taken forgranted is the availability of labour. Although aproject may be intended to benefit the entirecommunity, it is often difficult to find thenecessary manpower, especially if the need occursprecisely during harvest time. The migration ofmen to work in other zones of the country during

part of the year may also significantly reduce theavailability of manpower in certain months.

What other factors may determine the appropriatescale for the productive activity? The following areworth noting:

c Knowledge of, and experience in themarket. The existence of a well establishedmarket for the product(s), the variability ofprices from one month to the next, and therisks of losses (especially for perishableproducts) are all factors that should betaken into careful consideration whendetermining the scale of production.

c Prior knowledge of the technology. If thetechnology proposed is well known, theparticipants are experienced in its use, andrepair and maintenance services are readilyavailable, a larger scale of production maybe justified. On the other hand, if there isconsiderable uncertainty regarding theproduction process, or if the supply of rawmaterials is problematic, a smaller scale ofproduction may be wiser, as long as it isconsistent with the objectives of the project.

c The number of persons or families in thegroup of applicants. Obviously, it makes littlesense to propose a project that will generate$1,000 per year, if the project is expected tomake a significant contribution to theincomes of 100 families.

c Managerial capacity. Generally speaking, thelarger the investment and the more peopleinvolved, the more complex the job ofdirecting the work will be. If the applicant(s)have no prior experience in managinginvestments, it would be unwise to startwith a major investment. The lack ofmanagement capacity is probably the primecause of failure in small companies.

When determining the appropriate scale ofinvestment, always bear in mind the possibility ofcarrying out the investment in phases; that is,starting small, with the intention of expanding inthe future if all goes well. However, phasing ofproduction is possible only if the required financialresources are available over a long period of time.If the applicants have only a single opportunity toaccess financing, then using a phased investmentapproach will not work.

B. Choosing the Production Technology

Although the scale of the investment is, without adoubt, a primordial consideration in the selectionof the technology, other elements must also beconsidered, even in the simplest of projects.


25

Among these are:

c What are the market requirements? If themarket demands grain with no more than12% humidity and the project is located inan area of heavy rainfall, it would beimprudent not to consider buying a drier, ifthe project involves grain production. Ifthere is demand for shirts of a certain rangeof colours, it might be useful to include adying plant as part of the investmentnecessary for a clothing factory. If themarket pays a premium for out-of-seasonfruits and vegetables, it may be worthwhileto consider irrigation technology orgreenhouses for a horticultural project.

c What are the legal requisites regarding theenvironment or sanitation? The law mightdemand treatment of effluent from theproduction process (Chapter 5) and manycountries require specific measures (e.g.tiling, drainage, stainless steel counters, andinsect exclusion) in facilities used forprocessing foodstuffs.

c Will it be necessary to warehouse rawmaterials or finished goods? When rawmaterials are available for only a few monthsout of the year, it may be profitable toinvest in equipment (e.g. freezers) for theconservation of raw material and therebyextend the period of operations. If theprices of a finished good are highly variable,it might prove profitable to store theproduct (if it can be done) to sell in times ofhigh prices.

c How flexible should the production processbe? Up to a point, capital investment(machinery and equipment) can be replacedby hand labour and vice versa (see thefollowing illustration). It is, therefore,important to identify, at the outset, therelationship of the tasks that will be done byhand with the available manpower.Furthermore, due to their investment cost,or operating capacity, some technologiesare simply uneconomical below a minimumproduction level. If there is doubt as towhether that level is achievable, in light ofthe scale of production desired (see above)it may be necessary to consider otheralternatives

All of these factors should be considered as partof the technological evaluation. Frequently,neither the applicants nor those that help themwill have the technological capacity to answer allof the questions that arise. At minimum, it isimportant to speak with several sales people tofind out what technologies are available whichmight be appropriate for the needs of the project.

Better yet, if the financial agency has access tonon-reimbursable funds for technical assistance,would be to contract an independent specialiston the subject and work with that person. In thisway you will be able to adequately consider therelationship between the market, the availableresources and the production method.

C. Experience and Capacity of theApplicants

A frequently forgotten factor in the technologicalcalculation is the relationship between thetechnology chosen and the experience andcapability of the investors. If the technologydemands a management level beyond theabilities of the group, it could cause graveproblems in the quality of the product, or simplyresult in the failure of the entire process.

For example, if a group without prior experiencein aquaculture plans to develop three hectares of

When speaking of the selection of technology,we are generally thinking of the technologythat will be used in the operation of theinvestment (machinery, irrigation, etc.). Butthe investment process itself is also influencedby the technology selected, above all in thecase of non-income generating investments,such as buildings, roads and watershedprotection.

In such cases it is important to balance theneeds and requirements of the differentparticipants. From the point of view ofefficiency, for example, it might be better tocontract a specialized company with the latestmachinery to build the bridge within a fewdays. However, to ensure adequate localcontribution and ownership, it will often bebetter to use simpler technology, whichalthough slower, will allow the local inhabitantsto contribute their manual labour and developa pride of ownership in the structure.

The technology may also influencemaintenance needs. On the one hand,structures built with high technology mightrequire less maintenance (such as an asphaltroad) or work more efficiently (wells withelectric or gasoline pumps instead of handpumps). However, maintenance and repairmight be beyond the capabilities of thecommunity, and the sustainability of the projectwould suffer.

THE CHOICE OF TECHNOLOGYAND THE INVESTMENT PROCESS


26

ponds for the intensive production of tilapia, theproposal should be treated with extreme caution.Any form of aquaculture is subject to high risksfrom diseases and predators that can eliminate anentire population from one day to the next.When dealing with an intensive system, wherethe concentration may be up to ten times thenormal population, the possibility of disaster isvery high. In this case there are two broadalternatives:

a) Convince the investors to use a lessdemanding technology

b) Contract the services of a professionaloperations manager, with ample experiencein intensive production

Even in the case of a simpler technology (forexample semi-intensive production), if theparticipants have no prior experience, access totechnical support should be included as part ofthe investment cost.

In general, it is unacceptable for the project tolearn on a trial and error basis during the initialstages of implementation; buyers who receive aproduct of poor quality, or which does not complywith the demands of the market, simply will notcome back again. Technical support can come inthe form of training of project staff before start-up,and having technical experts on call to deal withproblems that may arise.

No amount or type of training can prepare aperson for all of the possible events of real life. If agroup of milk producers wants to open its ownprocessing plant, it should not expect that amonth long training course can prepare themadequately for the operation. As a minimum theywill need frequent visits from an advisor, andwould do much better to contract a specialist inmilk production, to guide them through the firstfour or six months of the project.

The following points should be seriouslyconsidered when choosing a technology

c Does the proposal call for very advanced,complicated or demanding technology?Unless the persons involved have ampleprior experience with such technology, it isrecommended that they contract an outsidetechnical manager or select a simpleralternative.

c In which of the operations will therebe a need for training (or at least, astrengthening of existing capabilities) forthe project’s personnel?

c Will it be possible for the project staff todraw on outside technical support duringthe first months (or years) of the project’sactivities? Would periodic visits be sufficient,or would the full time presence of an adviserbe required for the initial months?

c Will there be a need for quality controlequipment? (testing laboratory, humidity orcolour analysers, etc.) Who will operate thisequipment? Must they be certified orotherwise qualified?

D. Maintenance and Repair

The need to consider the costs of repair andmaintenance for the chosen technology isdiscussed in Chapter 6. Here we will consider thelogistical side of the process. That is, when youselect a technology you have to make sure thatthere exists a capacity to repair and maintain thatequipment. This consideration applies not only toprocessing and manufacturing machinery, butalso to vehicles and office equipment, especially"delicate" machinery such as copiers.

Among other factors for consideration are:

c Does the equipment come with a guaranteeor service contract, under which themanufacturer guarantees to keep it in goodcondition. If so, for how long does theguarantee or agreement last? Who does the manufacturer use for this work, and how far away are they based?

c Are there other users of the sametechnology in the project’s operating area?Who are they? Are they satisfied with theattention they receive regarding parts andservice?

c What are the sources of parts for themachinery? Do these sources carry a broadenough inventory of parts? Or do theyhave to order them from the USA or fromEurope? There is nothing worse thandiscovering, when a machine breaks downin the middle of the high season, that thevital part will take two weeks to arrive fromthe country of origin.

c Does the machine need service by anexpert, trained in the factory? Can anycompetent mechanic maintain theequipment? If a formally trained expert isneeded, where is the nearest person? Howmuch does he charge per visit?


Chapter V

SUSTAINABILITY AND ENVIRONMENTAL IMPACT


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V A. Why Consider EnvironmentalImpact?

For many communities and groups seekinginvestment funding, conducting an environmentalimpact evaluation may seem merely to increase thework required, while providing very little benefit.All too often, an environmental study is seen asbeing required for the sole purpose of satisfyingthe demands of the city slickers or foreigners whobarely know anything about the problems thatexist in the project area.

However the reality of the matter is very different.Environmental evaluation is not just an obstaclethat the applicants must surpass before fundingcan be approved; rather, it is a tool that will insurethat the resources invested will provide the projectwith the long term sustainability that is essential.At it is important to remember that not allinvestments require detailed environmentalevaluation. Many social projects, involvingeducation, health care, road repair or theprovision of other simple infrastructure will havelittle if any environmental impact and thus requirelittle time to be spent on evaluation.

What is the relationship between environmentalevaluation and the sustainability of the project?Although many factors may influencesustainability, in the rural environment the use ofnatural resources, such as water, soils andvegetation (e.g. trees) is often at the heart of theinvestment project.

If, in the life of the investment, natural resourcesare used in such as way as to result in theirdamage or destruction, it is clear that within avery few years there will be nothing left to exploit.One very common example is the conversion ofslopes or tree-clad hillsides into cornfields or otherannual crops. Within a very short time, all of thesoil on the slope has slid to the bottom of thevalley, and been carried away by streams andrivers, leaving behind barren slopes which yield solittle there is no point in continuing to farm them.And such bare slopes threaten not only theincomes, but also the very lives, of those living inthe valley below. Without the protection providedby the vegetation that once covered the slopes,hurricanes, monsoons and heavy rain can causegiant mudslides, engulfing whole communities.

Poor environmental practices can cause damagenot only to those responsible. If a processing plant(e.g. a slaughterhouse) discharges waste materialsinto a river, it can cause disease, loss of fish, and areduced quality of life for the entire populationdownstream.

Sometimes the damages caused by an investmenttake time to become apparent. For example, theover-utilization of underground water resources

SUSTAINABILITYAND ENVIRONMENTALIMPACT

The sustainability of an investment refers to itsability to continue generating benefits into

the future. This, in turn depends upon a numberof factors including the continued availability ofresources used in the project, the management,and the long-term relationship of benefits tocosts. Sustainability is probably the mostimportant aspect in project design andevaluation, but is also the factor that typicallyreceives the least attention – in part because it ishard to look into the future and predict whetheran investment will be sustainable in the long run.Many are not, and most people have seen theabandoned factories, empty schools and broken-down tractors that all represent unsustainableinvestments.

People often think that sustainability is the sameas profitability, and it is certainly true that aproject conceived to generate income can notbe sustainable if that income does not exceedthe costs of operating the project. Butprofitability alone in no way guaranteessustainability. A poorly managed project will failregardless of the underlying profitability of theinvestment, and this aspect of projects isconsidered in its own right in Chapter 8. Aprofitable investment will also fail if it depletes ordamages the natural resources it depends upon,whether they be trees, water or the organic matterin soils, and a considerable part of this chapter willexamine the factors affecting the environmentalsustainability of rural investments.

As mentioned earlier, there are in addition manytypes of investment whose principal purpose isnot the generation of income, for example a localschool. While the sustainability of projects of thistype does not depend on their profitability, otherfactors may be of importance, includingenvironmental sustainability (particularly aconcern for access roads, for example) andoperational and maintenance costs. If a projectgenerates little or no income, where is the moneyto be found to maintain and repair it year afteryear?

The financial sustainability of income-generatingprojects is dealt with in much greater detail in thenext chapter. In this section we analyse theimportance and impact of other factorsinfluencing the sustainability of rural projects, andin particular environmental impact and financingof non-income generating projects.


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can result in effects that become apparent onlyduring the lifetime of our children. Neverthelessthey are important impacts and eventually ourdescendents will accuse us of ruining their lives inthe name of a short-lived benefit.

The inhabitants of rural areas are more aware thancity dwellers of the relationship between peopleand the natural world we live in. Of course,everyone wants to have sufficient resources tofeed his or her family and to satisfy their needs foreducation and medical treatment. But a poorlydesigned project can result in a loss of income andreduced production in the future, which will leavethe family in worse conditions than it faces today.The future should not be sold out so cheaply!

B. What is Environmental Evaluation?

Traditionally, environmental evaluation consists ofa technical analysis of an activity or proposedproject. It is generally undertaken to identify andassess possible negative environmental impactsthat may result from the project, and to proposeappropriate mitigation and monitoring measures.

It is important that the environmental assessmentprocess is initiated early in project preparation sothat these measures can be incorporated intoproject design. It is also increasingly recognizedthat the assessment cannot be a purely technicalexercise, carried out by external specialists.Instead, it must involve project beneficiaries andother affected populations. Finally, recentenvironmental assessments are often not limitedto the biophysical environment, but also covereconomic, social and cultural aspects.

Environmental assessment (EA)

The general process of assessing environmentalimpacts associated with human developmentactivities which may include studies rangingfrom comprehensive (EIA) to more limitedreviews. It normally includes assessing potentialnegative impacts and elaborating measures tomitigate and monitor them.

Environmental Impact Assessment (EIA)

A tool used to identify and assess the potentialimpacts of a proposed project or activity,evaluate alternatives, and formulateappropriate mitigation, management andmonitoring measures (generally in the form ofan environmental management plan).

Environmental monitoring

Activities to measure and evaluate (i)environmental changes caused by a project and(ii) implementation of measures taken to

prevent or mitigate these changes.Environmental monitoring is based oncollection of data before, during and after theproject. It often uses indicators, i.e. quantitativeand qualitative variables which can bemeasured and which, if regularly observed,show changes in the project environment.

Environmental mitigation measureAn activity aimed at avoiding, minimizing,reducing the severity of, or controlling, adverseenvironmental or social impacts of a proposalthrough designing alternatives, scheduling,adding protective measures, and other actions.

Environmental screeningThe first phase of the assessment process, inwhich an initial ranking is assigned to a projectindicating the anticipated level of impact andthe corresponding required EA "treatment".

The types of rural investment projects consideredin this manual are of micro, small or mediumscale. Many of these projects have little or noimpact on the environment; their effect may evenbe positive (e.g. a decrease in erosion resultingfrom introduction of agroforestry). They generallydo not require a full Environmental ImpactAssessment (EIA), which are typically defined bynational environmental laws. However, asexplained in section A, even small ruralinvestment projects may have environmental riskswhich need to be assessed and, if necessary,mitigated.

As a result, this manual provides simpleprocedures for environmental assessment whichproposed in this manual provide a readily usabletool for environmental assessment of suchprojects. They are meant to be applied by localtechnicians, or other persons responsible forassisting the applicants in the preparation of theirinvestment proposals. The procedures alsoindicate when the potential impacts of a projectare so important that a specialized environmentalexpert is needed.

Some projects included in this manual - such asthose involving infrastructure construction, forestexploitation and agroindustry, as well as thosethat promote agricultural expansion, even on asmall scale - involve potentially significantenvironmental risks. These project types are, inmany countries, covered by the nationallegislation on EIA. In these cases, the responsibleparties should follow not only therecommendations proposed in this document,but also the relevant requirements established inthe legislation.


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C. Procedures and Stages ofEnvironmental Evaluation

Pre-selection of Project Proposals (screening)

Before entering into details in the identification ofpotential environmental impacts of the proposedactions, the project should be classified into one ofthe environmental categories described below.

An initial classification should be done by the localtechnician, preferably during the preparation ofthe project profile (RuralInvest Module 2) so thatthe environmental assessment process can belaunched at an early stage of project preparation.The classification should then be double-checkedduring detailed project formulation andevaluation (Module 3). When in doubt about theright category, the local technician should consultenvironmentally qualified regional/supporttechnicians.

Category A

Projects in which no or negligible adverse impactson the environment are foreseen and hence nomitigation measures are necessary.

Category B

Projects in which only low environmental impactsare anticipated. In these cases, possible impactshave to be identified as part of the projectformulation process, and a series of mitigationmeasures has to be elaborated and incorporatedinto project design before the project is submittedfor approval.

Category C

Projects whose environmental impacts may bemoderate or significant but which are stillmitigable. Category C projects normally requirean environmental assessment, undertaken by anenvironmental specialist, and detailed mitigationmeasure proposals before submission forapproval. The technician and theperson/committee responsible for projectapproval should also check whether a fullEnvironmental Impact Assessment (EIA) is requiredby the national legislation and consider whetherspecific environmental studies on critical aspectsshould be carried out.

Category D

Projects in which significant adverse effects areforeseen, for which there are no effective mitigationmeasures, or projects which are incompatible withthe sustainable development policies of theconcerned country or of international development

agencies. This category also covers activities whichare planned to be located within strict naturereserves or national parks3. In these cases, the project should either be completelyreformulated/relocated or rejected for funding.

Annex 1a contains an illustrative list of investmentprojects that can be included in the categoriesdescribed above. However, this list is onlyindicative, and the categorization of any individualproject should reflect the specific characteristics ofthe project site. It is thus recommended that,before starting RuralInvest use, environmentalexpert advice is sought on how to apply thesecategories in the project area.

When a project involves activities in more thanone category, the technician should classify it inthe category that refers to the activities with mostenvironmental impact. In other words, if aproposal includes activities listed in categories Aand B, it should be classified as category B. It isalso possible that, during the environmentalassessment, the technician is convinced that theproject should be classified in another categorythan the one originally selected. In that case, theproject should be reclassified accordingly, and anynew requirements followed.

According to this methodology, projects classifiedin Category A require no environmental mitigation,projects in category D would be excluded fromfinancing, and categories B or C would require anenvironmental assessment to identify theirenvironmental impacts and respective mitigationmeasures, which must be incorporated into projectdesign. For these two categories, we recommendthe following procedures.

D. Assessment Stages for Category Band C Projects

The procedures presented in this section areproposed for carrying out an environmentalassessment in four stages. These procedures aremeant to be applied by the local technician (orother person responsible for the environmentalassessment) but s/he should closely involveproject beneficiaries at all stages. Theenvironmental assessment process should also belaunched early enough (during phase 2, seeChapter 1) for the results to be incorporated in theproject proposal.

Stage One: Detailed definition of theproposed activities

To carry out an environmental assessment, it isnecessary to clearly define the project’s proposedactivities. In other words, the following questions

3 See section E.


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4 For example in road construction, cutting of trees along the road bed generates direct impacts (e.g. erosion andsedimentation in a nearby river) whereas indirect impacts may result from access to previously isolated areas, leadingto the conversion of forest into farmland.

should be answered: What does the project wantto accomplish? Where? What kind of materials,tasks and resources will be involved? How manydifferent ways are there to carry out theseactivities?

Stage Two: Definition of the environmentalcharacteristics of the proposed project siteand its immediate surroundings

At this stage, the environmental characteristics ofthe project area should be defined: type andquality of its water bodies (surface andgroundwater); types of soil and vegetation(rangeland, bush, forest, etc.); existing orproposed protected areas; distance fromecological, historical, archeological or uniquephysiological sites; special constraints (slopes,aridity, etc).

In many cases, this information can be found inthe local development plan or other similardocument.

Stage Three: Identification and evaluation ofpossible environmental impacts

At this stage, it is necessary to identify andevaluate the environmental impacts that may begenerated by the proposed activities in everyphase of the project; whether they are probable orunlikely, positive or negative, direct or indirect 4 ,reversible or irreversible, local or regional,temporary, permanent or periodic. Depending onthe nature and characteristics of each particularcase, the magnitude of the impacts should beestimated (e.g. insignificant, low, moderate orsignificant). In category C projects, wheneverpossible, the impacts should be quantified; forexample, the amount of soil that may be lost, thedegree of erosion that may occur, or the numberof endangered forest species that may disappearfrom the project area.

To provide guidance for the technician or theperson responsible for environmental evaluation,this manual includes a series of specificenvironmental checklists, applicable to differentactivities and investments in rural areas (seeAppendix 1b). The technician should make surethat the factors presented on the checklists areconsidered when environmental impacts areanalyzed.

Stage Four: Definition of mitigation measuresand their incorporation in the project design

Once possible environmental impacts have beenidentified, the technician should define themeasures that can be taken to prevent, minimize,

mitigate or compensate them. S/he should alsoindicate the costs of these measures and definewho should take responsibility on theirimplementation. The environmental checklistspresented in Appendix 1b include examples ofmitigation measures for impacts associated with avariety of rural activities and investments.

Finally, the analyst should present the results ofthe evaluation in such a way that the informationon potential environmental consequences andpossible mitigation measures can be used in thedecision-making process. This should lead into theincorporation of the suggested measures intoproject design.

E. Special Cases

Protected Areas

The procedures described in section D areapplicable to all rural investment projects,independent of where they will be implemented.In some cases, additional restrictions apply to theproject due to its location. This is the case ofprotected areas, established by the nationalgovernment or regional/local authorities toprotect and maintain biological diversity, andnatural and cultural resources. Protected areasoften consist of a core zone, with stricterprotection, and surrounding buffer zones or socalled multiple usage zones, in which morehuman activities are allowed. In addition, mostcountries have established, through legislation, asystem of protected areas, which often involvesseveral categories with different use andmanagement rules 5.

When a project is located within a protected area(or an area proposed for this classification), allinvestments and activities - agricultural, forestry,commercial, industrial or tourism - should beadapted to the following conditions:

c The activities should be located outsidestrict nature reserves, national parks, andcore zones, or zones established torehabilitate protected areas 6;

c Activities proposed for other types ofprotected areas, their buffer zones, ormultiple usage zones, should be compatiblewith the Management Plan of the PA. To ensure this, the applicant needs toestablish contacts with the competentenvironmental agency responsible fordefining the conditions and standards foractivities within the PA;


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c The following is an illustrative list ofactivities which may be allowed/compatiblewith the Management Plan. However, eventhese need to be environmentally reviewed,and approved by the competentenvironmental agency.

a) Sustainable extraction of non-woodforest products, that is, natural productsother than wood that can be obtainedfrom forests and wooded lands 7.However, these activities should notinvolve pesticide use or the extractionof lumber;

b) Sustainable agro-forestry activities;

c) Rehabilitation planting with nativespecies in deforested areas;

d) Community forestry;

e) Pasture management on naturalpastures;

f) Ecotourism.

Pest management

Pest management is a sensitive issue thatrequires special attention in rural investmentprojects in order to avoid potentially severeadverse health and environmental impacts.When preparing rural investment projectsinvolving crop cultivation, livestock raising orforestry, the technician should ensure that theproject adopts an "integrated pest management"approach (see below) and that the followingthree rules are respected:

First, purchase and use of pesticides classified bythe World Health Organization as ExtremelyDangerous (Class Ia) or highly dangerous (Class1b) should be excluded from financing. These

substances and examples of pesticide productsare listed in Appendix 1a, Table 1.

Second, purchase and use of pesticides over largeareas should be excluded from financing due tothe significant risk of health and environmentalhazards and difficulty of establishing an effectivecontrol system.

Third, purchase and use of pesticides classified bythe World Health Organization as ModeratelyDangerous (Class II) should be excluded fromfinancing if the following preconditions are notmet:

i) The country implements adequate legalrestrictions on the distribution and use ofthese pesticides;

ii) safeguards are in place to prevent the use of,and access to, these pesticides by laypersonnel, farmers, or others withoutappropriate training, equipment and facilitiesto store and apply them properly;

iii) Users adhere to precautionary methodsproven to be effective under field conditionsin developing countries.

All projects involving crop cultivation, livestockraising or forestry should adopt an integrated pestmanagement (IPM) approach to reduce relianceon synthetic chemical pesticides and to promotethe use of biological and environmental pestcontrol methods. Pesticides should be used on anas-needed basis only, as a last resort component ofan IPM strategy. In these cases, it should be ensuredthat (i) the selection of products minimizes healthand environmental hazards, and (ii) these pesticidesare correctly handled (including mixing andstorage) and applied (including use ofrecommended protective gear and appropriateapplication equipment and techniques).

5 The categories used by the World Conservation Union (IUCN) are presented below to give an example of possiblecategorisation. However, the number and names of PA categories, and related use and management rules, vary fromcountry to country. The local technician should become familiar with the PA system in use in his/her country.

IUCN categories: I. Strict Nature Reserve/Wilderness Area: protected area managed mainly for science of wilderness protection; II. National Park: protected area managed mainly for ecosystem protection and recreation; III. Natural Monument: protected area managed mainly for conservation of specific natural features; IV. Habitat/Species Management Area: protected area managed mainly for conservation through managementintervention; V. Protected Landscape/Seascape: protected area managed mainly for landscape/seascape protection and recreation; VI. Managed Resource Protected Area: protected area managed mainly for the sustainable use of natural ecosystems.

6 Since each country uses different names for the various types/categories of protected areas; the technician responsiblefor the environmental evaluation should adjust the names referred to above to those used in his country.

7 Non-wood forest products (NWFP) include products used as or with food (e.g. fruits, mushrooms, nuts, herbs, spices,cacao, honey, and animals hunted for meat), fibres (such as rattans), rubber, resins, gums, and plant or animal productsused for medicinal, cosmetic or cultural purposes. They can be gathered from the wild, or produced in forest plantations,agroforestry schemes and trees outside forests. NWFP are vital to the daily subsistence of forest-dependent communities,and contribute to the subsistence and local commercial economy in other rural communities. Some NWFP are alsocommercialised in a larger scale (e.g. cork).


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It is recommended that all projects involvingpurchase and use of pesticides, or that are likely toincrease pesticide use, are classified inenvironmental category C (see section C). Theywould thus require, as a minimum, anenvironmental assessment, undertaken by aspecialist, and detailed mitigation measureproposals before submission for approval.

F Monitoring Environmental Impacts

When carrying out the environmental assessment,the technician, together with future projectpersonnel, should also identify indicators formonitoring the environmental impacts of theproject and the implementation of theenvironmental mitigation measures. Environmentalmonitoring should be initiated at the start of projectactivities and continued throughout the project.

Through monitoring indicators, the projectpersonnel can:

a) Verify that the environmental mitigationmeasures are implemented and are achievingthe desired effect;

b) Detect possible unforeseen environmentalproblems in time to make the necessaryadjustments in the operation of the project;

c) Provide information and inputs for theevaluation of the project.

In Appendix 1b, a tentative list of monitoringindicators is presented for different rural activitiesand investments, according to project type(agriculture, forestry, aquaculture, ruralinfrastructure, eco-tourism etc.). However, theirapplicability to micro and small-scale projectsshould be checked during project formulation.The indicators should be cost-effective, andadapted to the available skills and equipment.

In addition to monitoring the impacts of eachinvestment/activity, it is often necessary tosimultaneously evaluate the overall impacts ofseveral investment projects implemented in thesame area. For this purpose, a survey instrument isproposed. An environmental survey on eachinvestment should be conducted at the end of thefirst year or, in the case of medium or long-termprojects, every two years. These surveys could becontracted to a consultant firm specialized in thearea or field concerned.

For these surveys, three environmental indicatorsare recommended:

a) Number of projects that have incorporatedenvironmental mitigation measures;

b) Number of person-months contracted toprovide technical assistance on environmentalaspects;

c) Number of environmental checklists/testcharts developed with technical assistance.

G. Specialized Support andEnvironmental Studies

1. TRAINING

For environmental impact mitigation measures tobe effective, project personnel must receivetraining in environmental matters. This trainingshould be provided to field technicians withtechnical responsibility on project execution,and/or to support/regional technician.

Training, which should be organized during thefirst two years of the project, could include, forexample, a one-week course on environmentalimpact assessment methods.

2. TECHNICAL ASSISTANCE

It is also recommended that the project personnelseek support from technical assistance programson environmental assessments. These programscould be tapped, for example, to contract – forshort periods – an environmental expert duringthe first year of the project. This consultant wouldbe responsible for providing information andassistance to project technicians on the evaluationof environmental impacts and their mitigation.S/he would also review the proposals presentedfor financing to identify possible environmentalimpacts and to determine if they were taken intoconsideration by the field technician working withthe applicant.

3. ENVIRONMENTAL STUDIES

As mentioned above, in the case of Category Cprojects, a specialized environmental expert orfirm may need to be contracted to study thecritical aspects of the project or to undertake a fullEnvironmental Impact Assessment (EIA). Specificstudies may also be necessary, for example, in thecase of agro-industrial projects, to evaluate the useof clean technologies or the design of wastetreatment facilities.

H. Social Impacts of Rural InvestmentProjects and Sustainability

The small-scale rural investment projectsconsidered in this manual aim at improving the


34

livelihoods of rural populations and, in manycases, also address social issues, such as health andeducation. It might thus appear improbable thatthey would result in major negative social impacts.

Nevertheless a number of potential investments inrural communities could result in profoundchanges in social relations within a community;changes that might ultimately threaten thesustainability of the investment itself. In one casein West Africa, for example, strong resistancedeveloped among many local farmers to theoperation of a recently established local school, asit was believed to have contributed to a steepincrease in the migration of young people tourban centres and hence a reduction in labouravailability within the community. The school wasfinally closed. Thus, all projects, even small-scalerural investments, should pay attention to possiblesocial impacts.

Key types of projects which may have a significantsocial impact include:

c Those affecting human health. Poorlydesigned irrigation systems, for example,may lead to growth in water-relateddiseases because insects proliferate in watercanals;

c Those related to changes in access to landand other resources. Development ofagriculture in a traditional pastoral area, forexample, may result in competition overwater points. This illustrates the wider issueof benefit-sharing: if all the benefits of aninvestment go to a small group of people, itmight lead to internal conflicts within thecommunity;

c Those increasing the economic power ofwomen or other disadvantaged groups. Theprovision of day care, access to markets(through new roads), or wage labour inlocal processing plants may all contribute tosignificant shifts in social relations within thecommunity.

c Finally, a project may also have unforeseennegative impacts on vulnerable groups, suchas indigenous people (if, for example,forestry activities are intensified in theirliving area) or women (if, for example, newagricultural machinery is introduced, andonly men are trained in its use). Specificmeasures may be needed to ensure thatthese groups fully benefit from theinvestment.

The environmental checklists presented inAppendix 1b include some social impacts andpossible mitigation measures, which should beconsidered in the environmental assessment.

I. The Sustainability of Non-IncomeGenerating Investments

In addition to considering their relationship withnatural resources, investments focused onproduction support, social benefits and evenenvironmental improvement – in other words,investments whose principal purpose is not togenerate income – face the challenge ofremaining sustainable once external fundingdisappears. In contrast to those projectsestablished to make a profit, projects of this typehave no guaranteed income flow to finance theirongoing operating costs.

The sustainability of these projects is thusdependent on the necessary resources beingavailable to continue operation, once the initialinvestment has been made. A school without ateacher, a clinic without a nurse or access tomedicines, or a road that has been washed out byspring floods, are all examples of unsuccessfulinvestments. In each case, there was a failure tomaintain the availability of the necessary resources(personnel, materials or maintenance) needed toinsure the long term functionality of theinvestment.

The process of formulation for non-profit projectsrequires that the source of these future resourcesbe precisely identified, and that the nature of theguarantees made as to their availability bedetailed. After all, an assurance of future resourcesis only as good as the guarantee that backs it up!Among the possible sources of resources for futuremaintenance and operating expenses, are thefollowing:

c Contributions in cash or in kind from thecommunity itself, through an association ofusers (drinking water, latrines, access roads,etc.);

c Charging the beneficiaries (healthcarecentres, schools, etc.) at least some portionof the service cost;

c Contributions from the local or municipalgovernment, including personnel, materialsor cash;

c Contributions from an NGO;

c Contributions from national ministries(health, education, public works andtransportation, etc.);

In fact a combination of several sources isgenerally necessary. Charging the beneficiaries is afrequent tactic, but rarely covers the entire cost ofoperations and upkeep.

Whatever the source(s) are, it is important toobtain and attach a letter of commitment to the


35

proposal, specifying the amount and the length ofthe guarantee. If the source is official (localgovernment or a ministry), you should try and

ensure that the organization’s future annualbudgets include this commitment.



Chapter VI

ESTIMATING COSTS AND INCOME


38

VI ESTIMATING COSTSAND INCOME

Costs and income, combined with the plannedproduction schedule for the activity (the scale

of the operation), together determine theprofitability of income generating activities, aswell as the need for subsidies or user charges inthe case of non-profit projects.

Although the evaluations of market, technologyand sustainability should have provided many ofthese parameters (product prices, cost ofinvestment, etc.), at this point we are still far shortof having total knowledge of all of the elements.

An important beginning step is to verify and classifythe costs. Initial assumptions on the cost of differentcomponents of the investment should be checkedout, and the costs of the investment, operation andgeneral expenses each require a different treatment.

A. Verification and Classificationof Costs

The essence of the process of evaluating anincome generating investment lies in comparingthe benefits generated to the costs incurred. Bydefinition, only those projects in which thebenefits are greater than the costs deserve to beimplemented. Even in the case of non-profitinvestments, social, environmental or productionsupport projects – knowing the costs is aprerequisite for calculating the value of theinvestment under consideration and forcalculating the amount needed annually to coveroperating expenses.

For profit-oriented projects, it is necessary toestimate both the costs of the investment and allthose costs and incomes that stem from theoperation of the project.

It is easy for an applicant, enthusiastic about hisproposal, to underestimate the costs of a projector to assign them to the wrong category, whichcauses errors in the calculation of financingrequirements. The process of preparing a projectprofile in the field lays little emphasis on verifyingcosts – best estimates are acceptable at the profilelevel. Therefore, as a first task in the process offormulation and evaluation, the applicants andtheir advisor should review all of the costspreviously identified, in order to:

c Determine whether the initial costs areassigned to the correct categories (initialinvestment, replacement of investmentitems, annual operations, overheads);

c Break-down generalized costs into theirspecific components, e.g. breaking downthe estimated overall cost of a building intosuch components as: site clearing andaccess; the foundation; construction persquare meter; finishing (electrical andplumbing); furniture, etc;

c Identify costs not previously included, e.g.technical assistance, training, legal orhygiene requirements, mitigation ofenvironmental impact, improvement ofaccess roads, etc;

c Verify the validity of the costs to be usedthrough direct contact with salespersons,transporters, engineers and other specialistsknowledgeable of the area.

The contrasting costs of a project can be brokendown into three principle categories:

a) Investments and their periodic replacement;

b) Production costs (which generally vary withthe scale of manufacture);

c) General or overhead costs (which typically donot vary as a result of changes in the scale ofproduction).

The following is a brief description of eachcategory of costs.

1. Investment and Related Costs

The investment is the heart of any project. In facta project can be defined as an activity in whichan investment is made now in order to obtaina benefit in the future. An investment is a kind ofexpense, but it can be distinguished by theduration of its impact. If the impacts no more thana year, the cost cannot be considered as aninvestment and must instead be treated as anoperating expense.

a. Types of investments

Not all investments take the form of physical assets,although investments in works and machinery are,undoubtedly, the most common. However, onecan also invest in less tangible things: for exampleeducation, research and systems. When you buy astore or other business, you frequently will have topay for the "goodwill" of the previous owner; thatis, his network of commercial contacts. It isconsidered that the relationship, developed by theseller with his clients over the years, is an asset thatis worth money.

Establishing a permanent crop (including the costsof labour) is also an investment. If small areas of


39

permanent crops are being replaced every year aspart of an established cycle (for example, 5% of thetrees every year), the cost is frequently included aspart of the operating expenses. While this does notmatter at this small scale, it is important toremember that the cost and availability of financingwill often differ according to its purpose. Ifsignificant areas are to be established in newplantings, or it is necessary to replace a highproportion of existing plantings (e.g. following thepurchase of a neglected farm), it rapidly becomesapparent that the high costs involved will causeproblems in the operating budget. However, if thenew plantings are treated instead as an investment(which they are), it will often be possible to obtainlonger term funds at lower rates, and there mayeven be a grace period on the payment of the loan.

When estimating the cost of a physical investment,the following factors must be considered:

c The initial price of the asset (machinery,equipment or materials) at their point ofsale;

c Any taxes levied on that price;

c Transportation of the asset to its finallocation, including insurance and, where theitem must cross borders, import duties;

c Installation and, if necessary, testing of theitem in its final location;

c Training of operators.

b. Economic Life

Some investments will last longer than the life ofthe project, especially in the case of physicalworks, construction and heavy machinery. Others,such as land, have no predetermined useful life,and it is generally assumed that their benefits willlast indefinitely.

However, many investments will have to bereplaced periodically, as they wear out (butremember: never less than a year, or it cannot beconsidered an investment). It is thereforenecessary to consider the economic or useful lifeof each investment; that is, the number of yearsthat it can be used until it is replaced.

Electronic equipment (computers, printers,telephones, etc.) are one of the categories withthe shortest economic life - perhaps no more thanfour years. In these cases, the economic life of theasset is primarily determined by the rate oftechnological change. A computer is normallyreplaced, not because it has ceased to function,but because it is no longer compatible with thelatest programs.

In the case of other investments, the economic lifeis strongly related to the use and maintenance of

the item, and the increasing cost of repair as itgets older. A car or truck, for example, can last aquarter of a century, but when a truck is used onrural roads in developing countries, the economiclife will not generally be more than 6 to 8 years.Remember, this doesn’t mean that the truck canno longer run after that time; rather that the costof keeping it on the road simply becomes too highto justify keeping it 8. Most businesses decidearound this time that it is cheaper to buy a newtruck and sell the old one.

The replacement cost should be recorded in theyear that replacement takes place. So, if you haveto change the old truck in the sixth year, youshould register the cost of the new truck (let’s say,US$35,000) in that same year.

c. Salvage value and residual value

Frequently, when an asset is replaced at the end ofits economic life, it still has value. Doubtless, thesix year-old truck still is worth a lot, maybe 20 or35% of its initial cost, depending on the taxstructure of the country. This value is called thesalvage value and it should be recorded as anincome in the year it takes place, in the same waythat the cost of the new truck is recorded as aninvestment cost. A few investments have almostno salvage value. These may include electronicequipment, fixed goods (such as wells, watercatchment tanks, etc.) or permanent crops at theend of their useful life span.

It is also necessary to take into account, especiallyin the case of investments having very longeconomic lives, that they may possess a significantresidual value at the end of the project life time.The residual value is what an investment is worthwhen the period analysed ends. For many assetsthis value is not enough to be worth recording,especially if it is in the distant future. However,when dealing with large assets such as buildingsand land, the residual value will often besignificant and can influence the profitability ofthe project.

To understand the importance of residual value, itis worth remembering that the project beganwithout any resources, but it used loans and othersources of financing to obtain the goods itneeded. During the period analysed, income fromthe project is applied to the payment of the loan.Before ending the analysed period, the cost ofthese goods has generally been completely paidfor. However, in the case of land, buildings, etc.,there still remains a great deal of value in theseassets and that value must be recognized whenthe project period expires.

Nevertheless, it is very important to distinguishcarefully between the annual cash flow and thefinancial rate of return (total profitability) - see

8 Also considering the cost to the project of having a truck out of service while it is awaiting spare parts.


40

Chapter 9. The buildings and other goodsrepresent a value, but not an income. So youcannot claim residual values when dealing withcash flow, but you can include residual values inthe calculation of profitability.

d. Depreciation

The subject of depreciation is always raised bystudents studying the RuralInvest methodology.Inevitably someone always asks why the cost ofdepreciation is not included in the calculations.

The answer is simple: depreciation is purely a tax-related measure, defined by the ministry offinance, internal revenue service or the treasury ofthe country in question, specifically in order tooffer fiscal benefits to investors. The tax authoritiesdictate the manner in which a person or companymaking an investment can use the cost of thatinvestment to reduce their taxes each year. Thisamount is the depreciation, and often has littlerelation to the actual life of the asset. It alsochanges from one type of investment to another,normally to support government policies towardscertain sectors or activities. When a companycharges depreciation in its accounts, it does notactually set aside funds for replacement of theasset, it merely reduces its tax burden.

As a result, the concept of depreciation is ofrelevance in a financial analysis only where taxesare being taken into account. Under RuralInvesttaxes are given little importance, as the purpose ofthe analysis is to determine if the project iseffective and sustainable, not to maximise after-tax earnings.

Given that the calculation of taxes normally is nota high priority among those who analyse ruralinvestments of small or medium scale, you canleave the concept of depreciation aside until theproject generates enough profit and calls for amature consideration of tax matters.

2. Recurring Costs

Investments are not the only costs that a projectfaces. Once the project is under way, there arecosts that must be met annually (or morefrequently). Costs that are not investments aredescribed as recurring costs; that is, they occuryear after year. This concept deals with twodistinct categories: production costs and generalexpenses.

a. Production Costs

These are all costs directly attributable to theprocess of production. For example, in the case ofa small workshop producing clothing, the cost ofraw materials (cloth, buttons, etc.), packaging

materials, and the electricity used to operate thesewing machines and irons are production costs.

Labour is also considered a production cost if it isdirectly related to the output of the garmentworkshop. In fact, any cost that changes directlyin relation to the production volume is aproduction cost. The estimate of these costs isdealt with in greater detail below.

b. General Expenses

These include any cost that does not normallyvary according to the level of production. So,continuing with the example of the clothingworkshop, we can identify as general expenses thesalary of the workshop manager, the lighting ofthe building, and the salary of the truck driver,because these items do not change according tothe level of production. General expenses mayalso include property taxes, insurance policies,telephone bills and accounting services.

In reality, the separation between production costsand general expenses is not always clear. Any costwill change if the scale of production increasesenough. If it the business is very successful, forexample, the workshop might need a new, largerbuilding, or it might need to hire departmentmanagers. On the other hand, is the cost of labourreally tied to the scale of production? For example,can you send the workers home in the middle ofthe day, without pay, if the workshop has ordersonly for half of the normal number of shirts? Onlywhere workers are paid "piece-rate" – that is pershirt produced – can labour really be said to be aproduction cost.

Deciding whether an expenditure is a production(i.e. variable) or overhead (i.e. fixed) cost can behelped by the following "rule of thumb": Any coststhat increase when the level of output increases(or decreases) by 10% will be variable costs. Coststhat remain unchanged, however, will beoverhead or general expenses.

3. Training Costs and Technical Assistance

The assignation of costs for training, educationand technical assistance frequently causeconfusion; however, the same rules apply here asfor physical goods. Any expense for experts andtraining that only occurs once, or that is repeatedonly at long intervals, is an investment.

If, on the other hand, the expense is repeatedannually or more frequently – as is typically the casefor agricultural extension services or specializedtechnical advisors – it is considered a recurring cost.However, the cost of such services generally is notclosely related to the output of the project. Forexample, the monthly visit of the veterinarian tovisit a cattle herd would not be likely to increase to


41

a frequency of every 3 weeks just because thefarmer increases the size of his herd 9. As a result, thecosts are recorded as a general or overheadexpense and not a production cost.

B. Assigning Costs and Income byActivity

In the identification stage (project profile) thesimplifying assumption was made that theinvestment will result in a project with constantactivities during the entire period analysed.

For example, an investment in a poultry operationmay be initially be supposed to produce a certainnumber of birds per year, every year of theproject, without any change. However, real life isnot so simple. The truth is that in many cases, andfor many reasons, project activities are notconstant every year.

One aspect that often changes with time is theefficiency of the production process. Yieldsimprove and losses are reduced. In the poultryoperation, the rate of hatching is likely to improveafter the first year, while greater experience inpoultry management may well result in fastergrowth among the birds, and hence quickerproduction cycles, as the years go by. By year fiveit may be possible to complete a broiler cycle(chick to saleable bird) in only 7 weeks, asopposed to the 10 weeks required at the start.

Another change may arise from new or modifiedproject activities. The poultry project maycommence turkey production as from year four, thusadding a new activity. A dairy plant may wish toexperiment with ice cream and yoghurt production,but not until the butter and cheese operations arewell established and running smoothly.

Still another possibility is that the costs andincome associated with the activity will not remainconstant. Growth and mortality rates for chickens,

and hence the costs and income from a poultryoperation, may well differ between the summerand winter months. Tomato production in the drysummer months may result in higher costs(irrigation), but higher yields, lower losses (fewerpests), and better prices in the market, than therain-fed tomato produced on the same land in thewetter winter months.

In all of these cases, it is not possible to talk of aconstant pattern of production. Rather,production patterns will change over time, andperhaps seasonally as well.

When dealing with activities in which theproduction cycle extends over more than one year(for example, tree crops or dairy cattle) suchchanges in the production model over time arenot only possible, they are inevitable. A plantationof avocados presents different costs and incomesas a function of its stage of development. As thetree grows from a sapling to a mature tree, theamounts of fertilizer, labour requirements forharvesting, and of course the income from theyield of fruit, will all change.

And if different plots are planted, or young stockpurchased, in different years, the result will be aseries of very complex changes, as the project willconsist of a mix of new, young, and matureanimals or plants which changes from year toyear. As a result, in the detailed analysis ofproductivity it is essential to clearly define thechanges in the costs and income of the projectwith the passing of time. This is the purpose ofusing blocks.

However, the use of blocks is not necessary in allcases. Most non-income generating projects, aswell as lacking changes in income, tend also tohave simple patterns of production, where manycosts are fixed, and activities are few. As a result,blocks are used exclusively for incomegenerating projects.

1. The Concept of Blocks:The Basic Unit of Analysis

A block is defined as any grouping of plants,animals or other production units that share thesame costs and income per unit of production.An activity (for example the production of maize)may be the same as a block, but not always. Thus,summer maize may fall into a different block fromits winter counterpart, if the costs and incomeper hectare are different, although it may be thesame variety of corn in both cases. By the sametoken, a blouse and a shirt manufactured in agarment workshop may be quite different, butboth may be considered in the same block, if thetwo pieces require the same amount of materialsand labour and if they are sold at the same price.

9 However, the cost of inputs and materials used by the veterinarian – medications, drugs, etc. – can be considered asproduction costs, because they will change according to the number of animals treated.

In some cases a proposed investment will buildupon an existing activity – for example addingan irrigation system to an existing productionoperation, or upgrading machinery in a foodprocessing plant. In these cases it is importantto distinguish between total costs and income,and those that are additional or incrementalto the project. Including all costs, includingthose presently paid, or all incomes, includingthose presently received, in the calculations forthe new project, will give a wrong impression ofthe profitability of the proposed new activities.The question of incremental project activities isdiscussed in more detail in Chapter 9.

Incremental Costs and Income


42

The blocks don’t always have to group physicalthings. For example, in an eco-tourism project,the block might be visitor/nights, while in atransportation project, the block might bepassenger/miles. Once again, however, avisitor/night in a double room would not be in thesame block as a visitor/night in a single room,because the income (and possibly the costs)would not be the same.

The unit of production, whether it be a hectare ofcitrus trees, a dairy cow, or a hotel room, may notstay always in the same block. A calf might be in ablock of new-born cattle for its first year, but it willthen move to the block of juveniles in the secondyear, before entering the mature dairy cow blockin its third year. After that, the animal might stayin this block until it is sold in its tenth year.

Although the concept of blocks might seemcomplicated at first, it is a powerful tool foridentifying and fine tuning the productionpatterns when changes take place from year toyear. It is particularly useful for investmentsdealing with permanent crops, breeding animalsand dairy production. The main problem for theuser lies in the exact definition of the blocks in aspecific case. The following points might help indetermining what is or is not a block:

c All production units in a block (hectare,head of cattle, kilo of cheese, pair of shoes,etc.) will always share the same costs andincome per unit. If those costs and incomediffer, it belongs in a different block;

c A project activity may be represented by assiinnggllee bblloocckk (if there are no changes in unitcosts and incomes over the period analysed),or mmaannyy bblloocckkss (where the activityexperiences changes in per unit costs andincomes over the period analysed).

c In the case of agricultural production, it isnot necessary for the areas to be physicallyconnected to each other. Two hectares ofcereals may be in the same block eventhough they are growing on different partsof the farm (or even on different farms, ifthey are in the same project);

c Breeding animals or perennial crops (forexample, a cow or a mango plantation) willmove from one block to another as theydevelop (and their costs and incomeschange);

c Do not confuse the age in years of a projectwith the age of the plants or animals.Although a project may be in its fifth year,the almond trees may have been plantedonly three years ago;

c As all production activities involving naturalresources (animals, crops, trees, etc.) willvary both between individuals and betweenyears, it is theoretically possible to define analmost infinite number of blocks. Eachcoffee bush could be its own block. For thepurpose of analysis, however, it is enough togroup together those that are similar, evenif they are not identical. For example, itwould be possible to assign a block to eachyear of a dairy-cow’s life, as milk yield slowlygrows and then declines, resulting inperhaps ten blocks. In reality, however, thedifference between the milk yield (andcosts) once a cow has had her first calf aresmall, and a single block may well suffice tocover the years 3-8 or even 3-10.

2. Determining costs and income per block

In order to construct a model of the overallperformance of a project over time we need toknow three pieces of information about eachblock. These are:

c The costs and income per unit of production(e.g. a hectare) within each block;

c The timing of costs and income per blockthroughout the year. This tells us when costsare incurred (and hence the need foroperating funds), and when income will beearned, and;

c The expected variation from year to year in thenumber of units per block (e.g. 20 breedingewes this year, 25 next year), and hence thescale of the costs and benefits associated witheach block in any particular year10.

As we have seen, if the project is simple (withoutany change of characteristics during the period ofanalysis) the blocks will be equal to the products(that is, tomatoes may have only a single block),and annual production levels may remainconstant from year to year.

Each block requires these three tables. Thus aperennial crop with blocks for each stage of itsgrowth and production requires several sets oftables. For this reason, before considering blocksin further detail, we must carefully examine twokey associated parameters: the unit of productionand the production cycle.

a. The Unit of Production

The definition of the unit of production is criticalbecause it will determine the manner in which

10 The need to estimate annual changes in production levels per block derives directly from a basic decision in RuralInvestto assess project performance on an annual basis (a standard practice in the financial world). Six monthly or evenquarterly analysis periods could also be used, but would require considerably more work. In fact, monthly changes arerecorded for the first year to determine working capital needs.


43

costs and income are measured. In many cases,the unit of production of a block or product isobvious. Generally, crops are measured byhectare, acre or other measurement of area. In thiscase, the use – and cost - of inputs (fertilizers,labour, etc.) can be calculated per hectare, and socan the yield at harvest. In the case of largeanimals, the unit may be the head, the breedingfemale, or the Livestock Unit.

However when dealing with other activities, thenature of the unit of production is not always soclear. In this case one must follow the rule that tthheeuunniitt ooff pprroodduuccttiioonn iiss tthhee mmoosstt ccoonnvveenniieenntt uunniitt ffoorreessttiimmaattiinngg ccoossttss aanndd iinnccoommee. For example, in thecase of an aquaculture project, the unit could be theentire stock of fish, the pool or tank or even theindividual fish, depending on which measure is moreconvenient when thinking of costs and income. If thefarmer is more used to thinking of feed per tank offish, then the tank is the obvious choice. However, ifhe or she thinks instead of the costs per fish sold, theindividual animal may make the better unit.

A word of warning here: TThhee llaarrggeerr tthhee uunniitt ooffpprroodduuccttiioonn tthhee lleessss eeaassyy iitt iiss ttoo mmaakkee cchhaannggeess iinntthhee pprroodduuccttiioonn lleevveell. If the unit of productionselected for a proposed fish farm is the tank (withan average of 5,000 fish), then you will beconstrained to increases (or decrease) productionlevels by 5,000 fish at a time, or starting usingfractions of a unit of production (0.5 of a tank, if anew tank will have only 2,500 fish). Size may notbe a problem if the project uses standard sizedunits, but an overly large unit of production canbe very inconvenient.

In the case of agro-industrial products orhandicrafts, the unit of production is frequentlyequal to the uunniitt ooff ssaallee; the piece of clothing, thekilo of cheese, the box of jars, etc. When dealingwith services (hotels, transportation, etc.) the unitof production might be the passenger (orpassenger/kilometre), the guest or the hour ofmachinery service. But remember: Once the unitof production has been selected, all costs andincome must be expressed in terms of this unit.

A family has just bought a 20 hectare coffeeplantation, consisting of 11 hectares of matureplants, 5 ha of old bushes, and 4 ha of coffeeplanted one year before. Although the plantsare dispersed around the farm, all of the areaswith mature coffee plants are bearing fruit andusing resources (agro-chemicals, etc.) on a fairlyuniform level; that is, all share the samecharacteristics of costs and income. The oldbushes are over 25 years old, and give loweryields than the mature plants. They also require

more agro-chemicals to control diseases thanthe younger plants, so they form a differentblock. The newly planted bushes, which requirecare but, as yet, bear no fruit; constitute a thirdblock. Of course, no plant is identical to itsneighbour, and no area of the coffee farm isexactly the same as any other. However, thethree blocks form groups of broadly similarplants. In the table below is a summary of theblocks in the first year of the project.

To determine how each block changes from yearto year, more information is needed about thecharacteristics of the blocks and the family’s plans:

a) The family decide to replace half of the ‘oldplants’ block in each of the first two years ofthe project (that is 2.5 has. per year);

b) The ‘new plants’ block contains plants inboth their first and second year of life. Thatis to say, the costs and income associatedwith plants in these two years are similar 11;

c) All of the areas within the ‘new plants’ blockwhen the farm is purchased are in theirsecond year of life;

d) None of the mature plants will move into theblock of old plantings within the next five years.

Under these assumptions, we can predict thenumber of hectares of coffee plants in eachblock over the first four years of the project:

DEFINING BLOCKS ON ACOFFEE FARM

11 In reality, coffee bushes do not pass directly from newly planted to mature in their third year, but the example hasbeen simplified.

BLOCK

New plants

Mature plants

Old plants

UNITS

4 has.

11 has.

5 has.

CHARACTERISTICS

Low maintenancecosts, withoutyields or income

Medium costs(including costs forharvesting). Highyield and income.

Relatively highmaintenance costs,Yields and incomeonly moderate.

BLOCK

Newplantings

Matureplants

Oldplants

Total

HectaresYear 1

4

11

5

20

perblockYear 2

2.5

15

2.5

20

perprojectYear 3

5

15

0

20

YearsYear 4

2.5

17.5

0

20


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b. The production cycle

The definition of the production cycle is importantfor the same reasons as the definition of the unitof production (above) - it determines the wayinputs and yields are measured. When we speak ofthree 50kg sacks of fertilizer per hectare, we referto the entire growing period of the crop, orproduction cycle, not per week or every 5 years.However, to properly understand the productioncycle we need to know two things about it: howlong it lasts (its duration) and how many cyclesthere are per year (its frequency) .

Duration of the production cycle: The durationof a production cycle is simply defined as theperiod necessary to complete the productionactivity. For most annual crops, it is the timebetween land preparation and harvest; perhaps12 – 14 weeks for short cycle crops, such asvegetables. Grain and legume crops such as rice,maize and beans will generally require longer.

In some cases, however, this simple definitionmust be modified. Remember that all analyses inRuralInvest (except working capital) areundertaken on a yyeeaarrllyy basis. Thus costs andincomes from an activity can not be calculated ona longer base than one year. As the productioncycle is a key parameter or input in calculatingthese costs, the production cycle must not exceed

12 months either, even if the life of the entireactivity – for example, a fruit plantation – spans 20years or longer.

Beyond agriculture, a different problem can beencountered in trying to define the duration ofthe production cycle. Many activities, such ashandicrafts, agroindustry, transportation, tourismand other businesses continue operatingthroughout the year, without a clear beginningand ending point for production. In this caseseveral options are available. One alternative is toselect the entire year as the production cycle.However, many costs (salaries, electricity,telephone, etc.) are typically paid monthly, so itmay be more convenient to define the cycle asone calendar month. Alternatively, if the plant orworkshop delivers the product for sale on, say, atwo weekly basis, it might make sense to selecttwo weeks as the product cycle duration. In theend, the choice may not matter very much, aslong as the period is convenient and you areconsistent in always measuring the inputs andoutputs over the same period for each activity.

Frequency of the production cycle: Wementioned previously that RuralInvest uses anannual basis for almost all calculations. So it is notenough to know how long each production cyclelasts; we must also know how many cycles arecompleted in the year under analysis. For activitiesthat are continuous throughout the year, theanswer is simple: the duration of each cycle (inmonths), multiplied by the frequency of the cycles(also in months) will add up to 12. Thus, if theproduction cycle of a rural shop lasts one month,there will be 12 cycles per year.

However, not all activities continue throughoutthe entire year. In agriculture and other types ofactivities based on natural resources, there willoften be periods in which no production isoccurring. Although the production cycle of acrop may last 4 months, it is not at all guaranteedthat there will be three cycles a year (producing 3cycles x 4 months = 12 months). Even two cyclesmay depend upon the availability of irrigation. Bythe same token, a vegetable processor mightdefine his production cycle as one month, but hisor her plant may only operate for 5 or 6 monthsper year, due to the lack of raw materials in othermonths.

c. Estimation of volumes and quantities

Even with a very careful estimation of the amountsused or generated in the process of production,mistakes frequently occur in these measurements.Below we consider two factors that often cause errorsin the estimation of input and output quantities.

Waste materials and losses: One factor which isfrequently overlooked in estimating quantities is

How did we arrive at the second table? The firstyear is the same as the first chart. But in thesecond year, we take away half of the oldplants, leaving only 2.5 has. in the block andestablish in its place 2.5 has. of new coffeeplantings.However, these new plantings are now theonly ones in their block because the 4 ha ofprevious ‘new plants’ being already in theirsecond year, have "graduated" to the block ofthe mature coffee plantings. The maturecoffee plants now number the original 11 haplus the new 4 ha. NNoottee tthhaatt tthhee nnuummbbeerr ooffuunniittss ((hheeccttaarreess iinn tthhiiss ccaassee)) iinn aa bblloocckk ccaanncchhaannggee aanndd nneeeedd nnoott bbee eeqquuaall ttoo tthhaatt ooff tthheepprreevviioouuss yyeeaarr.

In the third year of the project the rest of theold areas (2.5 has.) is replaced, leaving the ‘oldplants’ block empty. In its place a further 2.5ha is added to the ‘new plants’ block. Thisblock now consists of 5 ha because the other2.5 ha planted the previous year are not yetold enough to graduate to the mature block.The mature coffee block thus continues with15 ha. The reader can work out the area ofplants per block for the fourth year of theproject on his own.


45

that of losses, damaged goods and waste, all ofwhich are a normal part of many productionoperations. If 8 tons of green or sweet peppers areharvested in the field, it is highly unlikely that all 8tons will be sold. A certain percentage will berejected as too small or bruised, anotherpercentage will be damaged in transportation tothe point of sale, etc. It is very important to takethese sorts of losses into consideration if you wanta reliable estimation of costs and income. Lossescan also occur with respect to inputs. If you arebottling wine, it would be wise to assume thatsome of those bottles will be broken, and order asmall additional quantity to cover such breakages.

Another example is the conversion of fruits andvegetables in a processing plant. Take, forexample, a vegetable processing plant makingpickles. We can imagine that each bottle offinished product requires around 120 grams ofcauliflower, as well as carrots, zucchini, and othervegetables. However, it would be a bad mistake toestimate the requirement for cauliflower bymultiplying the projected number of jars of pickleby 120 grams. In reality, about 40% of eachcauliflower will be lost, as the stalk, leaves, anddamaged sections are discarded as the caulifloweris prepared. In order to end up with 120 grams ofcauliflower ready to use, you would thus need tobuy approximately 200g for each jar of pickle.

Self-supply/auto-consumption: Another elementthat may cause confusion is that related to thesource of inputs or the destination of products.Sometimes a project makes use of inputs that arenot paid for, typically because they come from thesame persons or families as own the project. Thisis called self-supply. A very common example inmany rural activities is the use of unpaid familylabour. Other ‘free’ inputs can include rawmaterials for processing, or even water, can alsooften be found. It is important to realise that theseinputs, even if not paid for, still have a value. Evenif he was not paid, a day’s labour provided by yourbrother could have earned him a wage workingon a neighbouring farm.

Similarly, if outputs are consumed on-farm (or bythe owners of the project) without being paid for– for example grain is eaten, or kept for seedrather than being sold - this is auto-consumption.Here the reverse applies. Even though the familydid not pay for the crops or animals they eat, theystill had a value, one that could have been gainedby taking the crop or animal to the nearestmarket.

The occurrence of either auto-consumption or selfsupply can lead to important differences in theresults obtained from the two principal projectmeasures used by RuralInvest. These are discussedin more detail in Chapter 9, but in cash flowanalysis, ‘free’ inputs and consumed products are

ignored, as the analysis deals only with cash.However, in financial terms, they must be takeninto account, because financial analysis tries toaccount for all costs and benefits with a marketvalue, even if it isn’t paid. After all, if you consumesomething instead of selling it, you do not reducethe profitability of the operation, but you do affectyour capacity to generate cash flow: a key aspectfor the bank or financial agency when consideringthe possibilities of a loan.

When estimating costs, is it important to considerthe value of auto-consumption or self supply?Normally, you should identify the cost (for selfsupply inputs) or the price (for auto-consumptionof outputs) at the nearest market - adjusted by thecost of transportation, if it is at some distance –and use that figure for the financial analysis.

3. The importance of the project’s first year

The first year in the life of any project is the mostdelicate and risky period. If a project is going tofail, in nine out of ten cases, it will do so in thisperiod. Why? Because the first year of a project isthe least secure; the employees are as yetunaccustomed to their duties; the management isless experienced; the suppliers and banks are morecautious; the buyers are less accustomed to theproduct.

More important, however, is the fact that duringthe first year of its life, a project typically lacks thereserves to absorb any setbacks or unexpectedevents. The lack of adequate resources forfinancing activities such as the purchase of rawmaterials, the payment of salaries or the cost oftransporting finished product to the market caneasily throw a new project into bankruptcy. Toreduce this risk, it is necessary to deal with the firstyear of a project’s life differently from other years.

4. Estimating the need for working capital

The lack of adequate operating funds hasprobably condemned more small projects tofailure than any other factor. It is always necessaryto calculate the needs for wwoorrkkiinngg ccaappiittaall; that is,the funds needed for the project to pay itsexpenses in cash, until it has accumulated enoughcash reserves to rely on its own resources. Manysmall projects begin operations relying on incomefrom sales to pay their bills. But they haveforgotten that, in the real world, it may take manymonths to obtain the payment you expect.However, especially when dealing with a newbusiness, the gasoline station, project employees,and the feed or fertilizer salesman, will all demandto be paid in cash.

In general, working capital is required to cover allproject expenses incurred as cash payments, from


46

the moment the expenditures begin until thefunds are received from the sale of the finishedgoods or products. The stages of this periodinclude:

a) Preparation for production, includingactivities such as: buying inputs (even if notyet delivered), preparing the soil; trainingemployees; contracting the transport, etc.

b) The production period. This may be a shortperiod (making a shirt, the production of akilo of cheese) or long (growing a crop) butiitt ccaann nneevveerr bbee lloonnggeerr tthhaann 1122 mmoonntthhss, forpurposes of calculating working capital

c) Storage. You may be able to make a shirt in afew hours, but perhaps the finished shirts areonly shipped to the wholesaler once a month.Sometimes, non-perishable products can stayin storage for months waiting for better prices.

d) Transportation and distribution. This may bea short period, but in the case of crops orother products for export by ship, it couldmean a wait of several weeks.

e) Waiting for the buyer to pay. While selling ina market generates immediate cash, this canbe the longest wait of all. Supermarketsfrequently delay payment for up to 60 daysand large agro-industrial plants sometimesfollow the same policy.

f) Clearing payment. Cash is immediatelyavailable, but do not forget that banksfrequently demand several days beforecrediting a cheque, and perhaps weeks if thepayment comes from another country.

g) Accumulating reserves. Working capital willbe needed not only to cover the periodsdescribed above, but also while the project isaccumulating enough surplus to allow anyoperating loans to be paid (if you have one),and then reserves equal to the entire workingcapital needs.

The combination of all these factors can bringabout a delay of many months, or even years,before the project ceases to require borrowedworking capital.

5. Cash Flow

In the previous discussion, it was proposed thatonce the project begins selling its output andreceiving income, it will be able to establishworking capital reserves. However, this is notalways true.

Some production processes are constant and thusworking capital is readily accumulated. Forexample a workshop making shoes may face the

same expenses every month, and can graduallybuild up working capital reserves from the marginearned each month (once money starts to flowin). Other business, however, are seasonal; inother words, there are only sales of the productduring certain months, or the volume ofproduction varies significantly from month tomonth. In other cases, you may have more thanone product, each having its own costs, incomeand working capital needs.

For example, let us look at the production of asingle product; tomatoes. We know that toproduce one hectare, we will need $500 in localmoney in working capital to cover the four monthperiod, from land preparation in February to theend of the harvest in May. As we have used up allour resources installing the irrigation system, wetake a loan for the $500. However, when we sellthe tomatoes in May and June we will earn $800,leaving us with a profit of $300 towards theworking capital in our next cycle (less the interestpaid on the loan). Unless we need the money forother purposes, we will need a loan of only $200next time.

However, if the project will cover several differentactivities – say tomatoes, squash and beans – thesituation becomes more complicated, because wemust know the relation between the costs andincomes of each activity. The only adequatesolution in these cases is to calculate exactly howmuch we must pay in expenses and how much wewill receive in income for the three activitiescombined: this is the monthly cash flow.

With the generation of a cash flow chart theworking capital needs become clear. In thefollowing chart, we can see the monthlyproduction costs for tomato, mentioned above,during the period from February to May ($125 permonth, or a total of $500). Income from the saleof tomatoes starts with $400 in May and isfollowed by a further $400 in June. However,these amounts may not be received until late inthe month, so they are only credited in the nextmonth (that is June and July). All income is bestcredited in the next month, as expenses in amonth may well become due before the income isreceived.

There are further complications. In May theproject will also face costs of $100 arising from thestart-up of squash production. Thus borrowingrequirements will reach a maximum of $600before income starts to come in from the sale oftomatoes. Even then, the project will still be short$300 until the next month, when the remaining$400 from the tomatoes enters the bank.

The chart also shows that the total amountreceived from the sale of tomatoes ($400 + $400,or $800) is not enough to pay both the working


47

capital loan for the tomatoes ($500) and, at thesame time, cover the costs of squash production($350). So, although the project breaks even inJuly, it will need still more funds to covercontinuing production costs for the squash inAugust. If the working capital loan for thetomatoes was paid-off in July, the project wouldhave to borrow further funds. Rather, it isnecessary to wait until September before clearingthe working capital loan. On the positive side, thecombined profit from the tomatoes and thesquash will be sufficient to cover the costs of thebeans, although available cash will be reduced toonly $350 by the end of the year.

Some readers may ask why the costs and incomefrom beans for the months of January throughApril do not enter into the calculation. If youthink about it, the answer is clear: the productioncycle for beans doesn’t start until September. Ifthe project commences in January, as it does inthis example, it is impossible to have costs (orincome) for beans in the early months of the year,as they could not have been planted the previousSeptember!

The chart shown here is simplified and lacks someof the elements that would have to be consideredin a real analysis. For example, the costs shownabove reflect only the production process itself.Any project will encounter other costs – both

general and fixed – that need to be paid duringthe first year of operation (like electricity, realestate taxes, family sustenance, the manager’ssalary, etc.). Therefore, an extra row is normallyinserted below to include general costs. Butremember: only include cash expenditures in thecash flow.

It might be that the net income predicted for theend of the first year is negative (for example,owing to perennial crops that do not yield in thefirst year) or, although positive, isn’t sufficient tocover the costs in the second year (as in theexample above). In these cases, working capitalloans would be needed in a second and perhapseven a third year. However, in general it is notnecessary to lay out a cash flow for each year. Ifcosts and income in the second year are similar tothose of the first year, you can simply repeat theworking capital needs of the first year in thesecond.

It is not usually necessary to prepare cash flowprojections for projects with one simple activity, orfor very small projects. However, for those withmultiple activities, or for larger projects, they areusually essential. In any case, RuralInvest providesa completely automated cash flow projection, sothe monthly cash flow chart is generated directlyonce the data on costs and expenses have beenentered for each block.

Aug

50600

-50-50

Jul

100

3000

Dic

50

-50350

Jun

400

100

300-300

May

125400

100

-225-600

Apr

125

150

-125-375

Mar

125

150

-125-250

Feb

125

150

-125-125

Nov

50

-50400

Oct

50

-50450

Jan

50

00

Sept

50

550500

Tomato: Costs per month

Income per month

Squash: Costs per month

Income per month

Beans: Costs per month

Income per month

Montly balancecumulative total

ACTIVITYCOSTS AND INCOME BY ACTIVITY OR BLOCK



Chapter VII

FINANCING THE INVESTMENT


50

VII FINANCING THEINVESTMENT

A lthough there are a number of ruralinvestment funds directed solely at non-profit

investments, the majority of financing provided tocommunities and individual applicants in the ruralsector also contemplate the financing of activitiesthat generate income; that is to say, profit-oriented activities. Although they might receivesubsidies, investments in income generatingprojects almost always require that the recipient(s)accept part of the cost of the investment in theform of a loan.

In this section, we characterize the different needsfor reimbursable (or repayable) financing anddiscuss the loan features that can influence thecost of financing.

A. Credit Requirements

Credit or loans are required to finance two basiccosts, and can be calculated as follows:

c Investment Loans: The total cost of theinvestment less (i) any grant funds offeredby the supporting agency; (ii) donationsfrom other sources (e.g. NGOs,government, churches etc.), and (iii)personal resources provided by theapplicants.

c Working Capital: Funds to cover operatingexpenses (as defined in Chapter 6) lessdonations and personal resources.

The availability of donated funds will depend onthe supporting agency and its resources. In manycases, in addition to covering the cost of the fieldtechnicians assisting in the preparation of theinvestment proposal, grant funds are alsoavailable to reduce or eliminate the cost to theapplicants of human resources and systemsdevelopment (training, designing accountingsystems, etc.) and for environmental studies andmitigation measures. In some cases, a supportingagency may offer grants or subsidies forinvestments in what are called ‘common goods’ –that is items that can be used by a wide range ofpeople, such as access roads, water collectionworks, etc. Less frequently, a supporting agencymight subsidize the cost of productiveinvestments or working capital for the operationof these investments.

One warning about the excessive use of donationsand subsidies: Although they might appear to bevery attractive to the applicant, he or she must be

careful to ensure that tthhee pprroodduucctt wwoouulldd ccoonnttiinnuueettoo bbee ffeeaassiibbllee oorr pprrooffiittaabbllee eevveenn iiff tthheessee ggrraannttss oorrssuubbssiiddiieess wweerree nnoott aavvaaiillaabbllee. Why? Because whenthe time comes to replace the investments, theproject may not be able to cover these new costsand can fail. Thus there is a real risk of undertakingan unsustainable project.

Although the question of financial feasibility tendsto apply more to income generating projects thanto social or environmental investments, it shouldnot be forgotten in these cases, either. For thesenon-income generating projects, donationsfrequently cover most, if not all, the investmentcost. When the time comes to repair the roof, orreplace the furniture, there are simply noresources available to cover the cost.

A certain level of personal contribution on the partof the applicants is important, and is generallyrequired by the financial agency. A significantcontribution of personal or community capital (incash or kind) demonstrates the borrower’scommitment to the project, and insures that, if itfails, the borrower will also suffer from the loss ofhis or her own capital.

1. Financing for investment

Investment financing normally occurs throughsingle credit with a loan duration of 4 to 5 years orlonger. Typically, in small and medium sizedprojects, a single loan is obtained to cover thetotal amount. However, in larger projects, it maybe wise to split the cost of the investment into twoamounts, especially if land is purchased. One loancan cover either land or other long terminvestments with long life spans (structures, heavymachinery, etc.). The second can be used forinvestments with short to medium life spans(vehicles, electronic equipment, etc.). On thisbasis, two loans would be requested, each with adifferent payback period, and probably interestrate.

It may also be the case that the financing agencyimposes limitations regarding the type of itemsthat it will consider, (for example, it might notallow loans to finance the purchase of vehicles). Inthis case it might be useful to divide the financinginto two parts: the majority of the costs to befinanced would be covered by the supportingagency, while alternative sources (e.g. commercialbank, cooperative, savings and loan association,etc.) would be sought for the financing of theexcluded items.

2. Financing working capital

Loans for financing working capital are alwaysshort term. They may be ‘rolled over’, or renewed,from one year to the next but are rarely extended


51

beyond one year. Thus, if there is a need tocontinue to use external financing for workingcapital in the second year, it would be morecustomary to pay off the current year’s loan at theend of the year, and then obtain a fresh one forthe following year.

This short term nature of working capital loansaffects the way that the loan is recorded in theaccounts of the project. Given that the loan isboth rreecceeiivveedd and then ppaaiidd bbaacckk within the sameyear, tthhee oonnllyy eelleemmeenntt ooff aa wwoorrkkiinngg ccaappiittaall llooaanntthhaatt aappppeeaarrss iinn tthhee aannnnuuaall aaccccoouunnttss iiss tthhee iinntteerreessttccoosstt ooff tthhee llooaann. The actual loan amount willneither appear as an income nor as anoutstanding capital debt as would be the case foran investment loan – only the interest paymentremains. This is illustrated below in comparisonwith an investment loan.

B. Loan Characteristics

It is impossible to carry out a financial analysis ofan investment without defining some of the keycharacteristics of the loans involved. Among thesefeatures, the most important are the interest rate,the grace period and the duration of the loan.

a) Interest rate

Interest rates will be determined by the financialagency that supports the investment. In somecases, these rates will be subsidized. Normally, theinterest rate for a medium or long term loan (forinvestment) will be different from the rate for ashort term loan (working capital). As RuralInvestworks with constant costs and prices, real – ratherthan nominal – interest rates should be used formedium and long term loans. The importance ofthis, and why it is done, is discussed in more detaillater in this Chapter.

b) Grace period

A grace period is the time during which theborrower need not make payments on his loan. Itis common for even commercial banks to offer

grace periods for medium and long term loans,but it is rare for them to do so for short termcredit.

There are two types of grace period. The firstrefers only to the payment of the loan capital. Thisis the most common. During the grace period onprincipal, interest is fully paid by the borrower butthe principal (or capital amount) remainsuntouched. Thus after one year, the borrowerowes the same amount as at the beginning. Thesecond type of grace period refers to interest. Inthis case, the interest is not paid, but instead isadded to the principal, thereby increasing thetotal amount of the loan. Grace periods oninterest are less common than on the principaland, if offered, tend to be shorter. A bank or otherlender may, however, offer to provide six monthsor one year’s grace on interest where it is clear thatno income will be generated in the first months ofthe project.

It is important to understand that neither of thesetwo types of grace period signify the forgivenessof any part of the loan. They only postponepayment, and where interest payments are notmade, will actually increase the size of the debt.

$ 2,000

$ 400

$ 200

$ 1,600

$ 200

$ 200

$ 20

$ 0

Borrowed at thebeginning of theyear

Principal repaid atthe end of the year

Interest paid(at 10%)

Principaloutstanding

Amounts Loan WorkingInvestment Capital

The managers of a small business finally decidethat the time has come when they can nolonger survive without a computer to keep theiraccounts straight and to prepare their invoices.They determine that a computer (with itsprinter, software and other necessities) will costan equivalent of US$5,000. They estimate thatthe equipment will have a useful life span of 4years and will have no significant resale value atthe end of its life. If the rate of interest on theloan is 10% per year, what will be the impact oftaking out a US$5,000 loan for 2, 4, or 6 years?

2 years 4 years 6 years

Annual Payment: 2,881 1,577 1,148

Total Payment: 5,762 6,309 6,888

You can see that the annual payment is almostdouble for the two year loan compared to thefour year package; that is, although the totalcost of the loan for 4 years is US$547 more thanthat of the 2 year loan (because interest is paidover a longer time period), the annual cost isUS$1,300 less. The 6 year loan is even cheaperin annual terms: only US$1,148. However, atthe end of the fourth year, when the computermust be replaced, the company will still oweUS$2,300 and must now also finance the costof replacement.

FINANCING THE PURCHASE OF A COMPUTER


52

c) Duration of the loan

The ideal loan is one that lasts just as long as theitem being financed. However, in real life, loansare used to buy a series of goods, each with itsown life span. So, you must define a period thatcovers the majority of the investments; especiallythe most important of them, in terms of cost.

If the loan has a shorter term than the life of thearticle being purchased, the project will have tofind a larger amount each year in order to pay itoff quickly. However, if the loan lasts longer thanthe item, the project could find itself in a positionwhere it is starting a new loan to finance areplacement, while it has still not yet finishedpaying off the original loan (see box).

In any case, the life of a loan for investmentsshould not be longer than the period of analysis ofthe project. If the nature of the goods and theproject itself justify a 20 year loan, then it isnecessary to analyse a period of 20 years.

C. The Changing Value of Moneyover Time

As we mentioned earlier, a possible definition of aproject is "an investment today in order togenerate a flow of benefits in the future".However, this difference in time – the investmenttoday and the benefits tomorrow – causescomplications. We all recognize the fact thatsomething received in the future is worth less thanthe same thing received right now. For this reason,it is not possible to say that a project is feasiblesimply because its future income is greater thanthe present investment. Everything depends onthe relative value of the money (or other benefits)today and in the future.

Below, we will consider the impact of time on thevalue of money and describe how to take this factinto account when analysing an investment.

1. Inflation and Future Value

When we speak of the difference between moneytoday and in the future, many people immediatelythink of inflation.

It is true that when there is inflation, the futurevalue of money is less, as a consequence of the risein prices. However, tthhee mmeetthhooddoollooggyy uusseedd bbyyRRuurraallIInnvveesstt aatttteemmppttss ttoo eelliimmiinnaattee tthhee iimmppaacctt ooffiinnffllaattiioonn bbyy ccaallccuullaattiinngg aallll ooff tthhee eelleemmeennttss ooff tthheepprroojjeecctt iinn tteerrmmss ooff ccoonnssttaanntt pprriicceess. That is to say, itis assumed in the analysis that the prices of allgoods, inputs, labour, products, etc. will stay thesame during all of the years analysed. Thus, if a

day of work in the workshop or school costs $2.50in the first year, it will cost $2.50 throughout theperiod of the analysis, even if it is 20 years.

How is it possible to do this? The answer is thatalthough it is probable that the costs will rise withthe passing of the years, the prices received forthe sale of the products will also rise. So the rise incosts will balance out the increase in income, andthere will not be a significant distortion in theresults 12. Excluding inflation from the calculationeliminates the need to calculate new costs andprices for each year of the analysis, an exercise thatmay well be justifiable in projects involving multi-millions, but not in small or medium sizedinvestments.

However, inflation is not the only factor thatmakes something in the future less valuable thantoday, and entices us all to prefer something nowthan in an uncertain future.

According to The Economist magazine, prices inEurope in 1914, at the beginning of the FirstWorld War were not, on the average, higher thanthey were in the 17th Century; that is in 200 yearsthere had been no inflation. But the banks inEurope continued offering positive interest ratesfor deposits during this entire period, althoughoften no more than 2 or 3% per annum. So, evenwithout inflation, people demanded somecompensation (the interest rate) for waiting untilthe future to have their funds.

Below we discuss what factors influence interestrates in the absence of inflation.

2. Constant Prices and the Real Interest Rate

If constant prices are to be used for inputs andproducts, they should also be used for the cost ofmoney; that is, the interest rate, as interest ratesare heavily influenced by inflation, both actual andexpected. For medium and long term loans,therefore, the model used by RuralInvest deductsthe current inflation rate from the ‘nominal’interest rate (that is the one paid by the client),thereby leaving a "constant" or "real" interest rate.

The question of real interest rates on loans is thearea which presents RuralInvest users moredifficulties than perhaps any other. To understandhow inflation affects the interest rate, let usconsider the different elements that combine todetermine the rate charged by a lender (bank,cooperative, project, etc.):

a) The initial cost of the funds: the price that abank or other lender pays the deposit holderswhose money they use;

b) The cost of administering the loan: this iscommonly the highest cost for small loans, as

12 In fact, in the absence of very different inflation rates among the different elements of the project, probably the mostimportant impact in using constant prices found in the underestimation of the needs for working capital.


53

it takes almost the same time to process aloan for $500 as it does for $500,000;

c) The risk of loss or delays in payment: thisvaries with the kind of security offered by theclient and how well the bank knows theclient;

d) The profit margin required by the bank:the part of the loan cost that generatesprofits for the bank.

Expectations concerning the inflation rate over thelife of the loan clearly influences at least two ofthese elements – the cost of funds and the bank’sprofit margin. To compensate for any decrease inthe value of funds due to inflation (either thebank’s own funds or those of its depositors), thebank will have to increase these two elements,increasing the overall interest rate.

Where inflation rates are significant, there can bea major difference between nominal and realrates. In fact at very high inflation rates, realinterest rates will often drop below zero, becauseit takes some time for people to believe thatinflation will stay so high into the future.

It is very important to be clear about one thing.The use of a ‘real’ interest rate (that is one thatexcludes inflation) helps us to determine theunderlying feasibility of the project – iitt ddooeess nnootttteellll uuss hhooww mmuucchh tthhee pprroojjeecctt wwiillll ppaayy eevveerryy mmoonntthhoorr yyeeaarr ttoo tthhee ffiinnaanncciinngg aaggeennccyy. That is not itspurpose, although a user can get some idea ofthese actual payments by setting the inflation levelto zero in the RuralInvest software. This will force

the computer to make the ‘nominal’ interest rateequal to the ‘real’ rate, and the paymentscalculated will be thus be at the nominal rate.

Even if the nominal rate is used, however, extremecare must be taken in assuming (or even worse,telling the applicants) that the amounts calculatedby RuralInvest are those that the project will payonce underway. This is because there are manyways to schedule repayments, as well as toincorporate associated loan charges. For example,while it is common to equalize payments over thelife of the loan (as is done with mortgages and inRuralInvest), this is not essential, and some lenderswill vary payments according to the amountoutstanding, which will mean high payments inthe early years. Still others will ‘balloon’ paymentsat the end, resulting in low costs early on, buthigh costs towards the end of the loan period. Allinvolve the same interest rates, but result in aquite different pattern of payments. In a similarmanner, some agencies will charge cash for loanservices, while others will add them to the loanamount, or to the early payments, and so forth.Thus, tthhee llooaann ppaayymmeennttss ccaallccuullaatteedd iinn RRuurraallIInnvveessttaarree nnoott aa ggoooodd gguuiiddee ttoo aaccttuuaall ppaayymmeennttss tthhaatt wwiillllbbee ffaacceedd bbyy aa pprroojjeecctt.

In theory, the same method of eliminatinginflation could be used for working capital, but therelation between constant prices and real interestrates is less clear over short periods, because someprices respond more quickly than others. For thisreason, in the case of less-than-one-year loans, themodels use current interest rates, which give us ahigher cost than necessary; but it is consideredbetter to take a conservative position.



Chapter VIII

ORGANIZATION AND MANAGEMENT OF THE

INVESTMENT


56

advantages and disadvantages of registering asmall business in each specific case.

In broad terms, however, formal registration of aproject as a company may bring some of thefollowing benefits:

a) It can facilitate access to formal sources ofcredit (banks, etc.) as well as governmentprograms that support small enterprises;

b) It will often permit the business to reclaimvalue added taxes (VAT) on goods andservices purchased;

c) It may help employees to access statemedical insurance and social welfareprograms;

d) It may give the company the right to importcertain products (for example, packagingmaterials and inputs) tax-free, in those caseswhere the end product is destined for export.

Among the possible disadvantages of registrationare:

a) Bureaucratic red tape, which is frequentlytime consuming and frustrating;

b) The need to maintain a variety of records anddocuments in order to comply with legalrequirements;

c) Responsibility for collecting VAT on sales andremitting it to the fiscal authorities;

d) The possibility of attracting more attentionfrom the tax authorities

2. Multiple Owners

When dealing with an activity that involves agroup of persons, or an entire community,further options can be added to those discussedin individual investments (informal andcompany). The most common alternative is theuse of a cooperative structure, although somecountries also offer other types of ownership forgroups.

It is not recommended that cooperatives befounded for the explicit purpose of managing aninvestment. A successful cooperative is the resultof a series of developments involving a number ofcommunity efforts. A process of maturation andlearning is required before a cooperative cansuccessfully take on the responsibility for directingand controlling a project of significant size.However, if the community already has an activeand well managed coop, this may be the mostattractive solution.

Nevertheless, in spite of all their ideals, in manycountries cooperatives have had a disappointing

VIII ORGANIZATION ANDMANAGEMENT OF THE INVESTMENT

T he organizational and managerial aspects ofan investment proposal constitute an area that

rarely receives the attention it deserves. Themajority of effort is generally dedicated tofinancial and technical factors, and very little timeis spent on defining an appropriate and effectivemanagerial structure. As a result, many small andmedium investments - especially those that areowned by groups or communities - fail because ofproblems of control or management.

Rural communities typically do not have manypeople with management and businessadministration experience, and it is risky toassume that these are functions that will solvethemselves, or that their definition can be left forthe stage of project execution. Below, we discussthe three most important factors determiningproject organization and management:

a) the ownership structure

b) supervision and oversight

c) daily management

There is also a brief discussion on the use oftechnical assistance by the management team.

A. Ownership Structure

The first task that is encountered in determiningthe organizational and managerial model for aninvestment is the choice of its ownershipstructure. Typically, there are several availableoptions, including both informal and formalstructures. However, the decision depends to agreat extent on whether the operation orinvestment will be carried out by a single personor family or by a group of persons or families.

1. Individual Owners

In the case of an investment made by anindividual, or a single family, the principal decisionconcerns the necessity and usefulness offormalizing the legal status of the activity byregistering it as a corporation.

This manual offers no guidelines on legal aspects,mainly due to the number of countries in which itmay be utilized. It is therefore the responsibility ofthe people in charge of the process of formulationand evaluation of the investment to determinewhat the legal requirements are, as well as the


57

history, and most success stories appear to resultfrom the efforts and dedication of a singledynamic individual. If a cooperative structure isconsidered, therefore, it is necessary to insure thatthere is a firm commitment on the part of itsmembers to make it function adequately.

Should you instead select the corporate structurefor a project that belongs to a group orcommunity, certain key decisions must be maderegarding the nature of the corporation, and it ishighly recommended that a lawyer be consulted ifpossible to ensure that the options available areclearly understood.

One possibility is to issue shares to all of theparticipants, in much the same way that acompany on the stock exchange does. At theend of the year, the company will distribute anyearnings according to the number anddistribution of its shares. In this case, however,the right of the shareholders to sell their shares(and to whom), and the requirement that theyactively participate in the project must beestablished from the very beginning. Forexample, if a community corporation is used as amarketing channel for products derived from onlysome villagers, it may be considered importantthat these participants have the right to increasetheir shares in comparison to those of non-participants.

B. Supervision and Oversight

Any project or operation that manages significantresources, and represents the interests of morethan two persons, requires some form of board orsupervisory committee. Obviously, the size andresponsibility of such a group depends on thescale of the project.

If a small group of families establishes anoperation involving 5 workers, there is no need fora Board of Directors with 12 members that meetsevery month. However, even a small operation, orone that only performs one task (for example,selling the agricultural product of the memberfamilies), needs some kind of oversight. If thisdoesn’t exist, the enterprise runs the risk of misuseof funds or resources by the person or persons thatadminister it.

In the case of relatively small groups, it is possiblethat everyone involved can participate in theduties of direction and general follow-up of theactivity.

When dealing with larger groups, however, it isnecessary to rely instead on the formation of aboard or steering committee. Such a Board willrequire bye-laws, which define matters such as:

a) How many people constitute a committee?We recommend a minimum of 5 and amaximum of 8 or 9 persons

b) How much time can each person serve as amember of the board or committee? Theremay be no limits, but frequently a maximumof two or three years is appropriate.

c) Should the duties of the President, thesecretary and the treasurer be defined? This isgenerally not recommended, except for thesmallest of committees.

d) How often should they meet? This could bemonthly, quarterly or even every six months,according to the scale of the operation andthe complexity of its operations.

e) How frequently should the Board presenttheir report to the other members? It isadvisable to do so once a year.

The supervision of the project can be as importantregarding what it does not do, as for what it doesdo. While a Board of Directors or any supervisorycommittee should play an important role inmonitoring the progress of the project and thestrategic decision making process, it is not anadequate forum for making managerial decisions(and even less so when supervision is theresponsibility of all of the participants). Manyprojects have been destroyed by boards andsupervisory committees that obstruct themanager from fulfilling his responsibilities.

The by-laws of the company, cooperative orgroup, in addition to defining the structure of theboard or supervisory committee should specifythe following:

a) Areas of responsibility of the Director’sCommittee:

c Hiring (and firing) the manager or personin charge of the day to day decisions;

c Review and approve the bi-annual orannual accounts of the project;

c Make decisions regarding thebookkeeping method for the projectaccounts, and the use (if any) of auditors;

c Strategic decisions, such as: types ofactivities to be carried out; approval ofsignificant investments and possibly, thedetermination of employee salaries.

c Call general annual or extra-ordinarymeetings.

c Make decisions concerning thecontracting of external experts to reviewor assist the operations of the project


58

c Establish general procedures for selectingsuppliers, contracting personnel andcarrying out other similar activities.

b) Areas normally out of the competence ofthe Director’s Committee:

c Making decisions on production levels(within the range determined by staffinglevels and equipment capacity);

c Buying and selling input materials andproducts (including the determination ofprices and the selection of markets);

c Administrative activities, such as keepingrecords, dealing with bills, invoices andreceivables, and relations with clients andsuppliers;

c Personnel selection (within agreed uponstaffing levels).

It is important that the Board or SteeringCommittee allow the manager of the operation tomanage the activity according to his or hercriteria, and not attempt to dictate day-to-daydecisions. If the committee lacks confidence inthe manager, it must refuse to renew theircontract at the end of the agreed term and seek areplacement. By revoking or changingmanagement decisions, they only destroy themanager’s ability to run the project in an efficientmanner.

Only when the committee finds (or suspects) themanager guilty of illegal activities, or activitiescontrary to the previously established and agreedupon guidelines, should there be grounds for adirect intervention in the activities of theoperation. Even in this case, it is recommendedthat the Board or steering committee seek theapproval of an extra-ordinary general assemblybefore acting.

C. Daily Management

Once the structure and the mandate of thesupervisory and oversight group have beendetermined, project management andadministration needs should be defined.

The smallest of projects may need no more thanone person, responsible for all tasks in both areas.However, it would be a false economy to place allof the responsibility on one person when theproject generates significant costs and income.

A common combination for a small project is ageneral manager backed up by a bookkeeper. Thissecond person may also carry out the duties of

secretary. In a larger operation, the followingpositions may supplement the general manager,according to the types of activities carried out.One of these positions may be the particularresponsibility of the general manager:

c Field manager: in charge of field operationsincluding raw materials and inputsproduction or procurement;

c Plant manager: responsible for all operationswithin the facility, including processing,packaging, storage etc.;

c Sales manager: responsible for all marketingof the finished product;

c Financial manager/Accountant: Responsiblefor maintaining project accounts, dealingwith banks and managing payments andreceivables;

c Personnel officer: responsible for managingemployees including labourers, field hands,secretaries, technicians and administrativestaff;

c Foremen: supervision of routine labours inthe field or in the production process.

Nevertheless, only a very large operation couldjustify filling all of the positions described above.Remember: these positions represent fixed costs.In other words, costs that are paid regardless ofthe volume of production. Furthermore, althougheach additional person in management has nodirect impact on the volume of production, theydo increase the general expenses (telephone,office supplies, office space requirements, etc.)Extreme caution is therefore needed in defining alarge managerial structure.

Among the areas covered by the generalmanager’s mandate and which he/she maydelegate to his assistant managers, the followingare worth noting:

c Decisions on the daily production volume orthe combination of products to produce;

c Decisions on planting or harvest dates, orthe beginning of seasonal operations;

c The selection of supply sources for rawmaterials and inputs and the price to bepaid (in some cases, according to guidelineslaid down by the management committee);

c The selection of markets, timing of supply,and the decision over sale prices;

c The determination of the number ofemployees needed and their selection,frequently within the limits set by thesupervisory committee


59

c Approval of normal expenses, such as officesupplies, fuel purchases, electricity, water,maintenance, etc.

D. Technical Assistance and ManagerialSupport

The demands of management and administrationof a business or other rural activity are frequentlybeyond the capabilities and experience of theparticipants. In order to bolster this area, it may beworth considering three broad levels of externalsupport.

A project might require one or more of thefollowing types of assistance, at least during thefirst years of its operation.

1. Professional Full-time Managers

This option is recommended when dealing with afairly complicated operation or which involvestechnical activities that are very demanding on theparticipants and for which they have little priorexperience. A common example might be a foodprocessing operation, such as cheese or juices,where poor quality can not be tolerated. It is rarethat a project, except in the case of the largest,need more than one outside manager

In some cases, it may be that the community orthe investors have technical capability, but noadministrative abilities, or that the marketingprocess calls for a highly experienced expert. As aresult, it is not always the general manager postthat is the position to be filled, an externalaccountant, plant manager or sales managerbeing more valuable.

When using an external manager, it isrecommended that his or her contract be for a longenough period to allow the business or activity tobecome established on a firm base. This could befor a minimum of two or three years, with the rightof earlier termination, in case the investment fails tomeet determined levels of volume, sales or otherindicators. In addition, it must be made clear fromthe outset that the position is not permanent, andthat the manager must train one or more assistantsfrom the community or group, who can eventuallyreplace him.

In addition to the right to terminate the contract,it is also suggested that the rewards of the job(salary, benefits) be linked to the performance ofthe business. For example, a moderate basic salaryplus a portion of yearly profits, which will yield agood income if the project performs well.

The cost of an experienced, successful managercan be substantial. It is, therefore, not often

feasible to employ one on a small project, wherethe earnings are insufficient to cover their cost andleave some profits for the owners/participants.Nor should a full-time manager be used for socialor environmental investments (which generatelittle or no income) unless an NGO, internationaldonor or state agency is willing to guaranteefinancing the position.

2. Management Consulting and PeriodicalAdministration

In cases in which the size or complexity of theoperation does not justify contracting full-timeexperts, serious consideration may be given tousing a periodic consulting or advisory service. Asa minimum, a small or medium sized investmentcould benefit in the following areas:

c Financial systems: Help is often needed toestablish and train staff in the operation ofthe accounting system, including periodicfollow-up visits to review the financialaccounts. For medium size or largerprojects, it is recommended thatprofessionally qualified persons be used andthat the operating rules call for a certifiedaccountant to carry out one – or better yet– two inspections of the financial accountsper year.

c Strategic Planning: Assistance in this areacan provide significant support for theBoard or supervisory committee and themanagement in the preparation, executionand monitoring of a coherent plan for thegrowth and development of the operation,including decisions about the goals,changes in the activities themselves andnew investments. This type of supportnormally need be no more frequent thanonce a year, and is frequently undertaken atlonger intervals (every two to five years).

c Marketing: Consultants or advisors familiarwith the product can carry out anevaluation of the existing markets, identifypotential new markets, and draw attentionto the need to modify the product (or someaspect of its presentation) in order toimprove its market position. Again, unlessthe operation is facing a crisis, assessment inthis area is not recommended more thanonce every two or three years.

c Technical processes: Support may beneeded for overall product quality control,solving specific problems, and reviewingtechnical procedures. Generally, this type ofsupport is particularly useful during the first12 to 24 months of the operation, but itmay continue, on a reduced scale (half-yearly visits) indefinitely, particularly if the


60

specialist(s) bring knowledge ofdevelopments in other countries or markets which the project management is not familiar with.

c General Management: This is most oftenrequired when the inexperienced managerof a small investment does not know whereto look for help in solving the problems thathe encounters. It may, in fact, be difficult todistinguish whether a problem is badenough to justify calling upon externalassistance. Sometimes a government agencyor internationally funded project will coverthe cost of having a management expertvisit the project on a periodic basis to assesswhether the operation is proceeding well.

Whether or not the last of these services isavailable or utilised, it is very useful to havesomeone who is available by telephone in anemergency, to advise the manager on how toevaluate a problem and suggest where he can findhelp, if necessary. The ideal solution is that theperson who helped in the evaluation of theinvestment, that is, the person that appliedRuralInvest, stay in contact with the investorsbeyond the formulation stage to give themsupport in all of the areas they need. This matteris discussed in the following sub-section.

3. Teaching Skills and Training

With the exception of the smallest investments, itis rare for a project not to have at least some needfor training. In the previous sub-sections, we

analysed some of the areas where it is oftennecessary to strengthen the skills of project staff,including those working in accounting systems,financial control, marketing and sales, andstrategic planning. Also there might be a need fortraining the technicians in production processes,packaging, quality control and management ofinputs or finished goods, among other areas.

It is not necessary to carry out all training prior toproject start-up. In some cases it is preferable tofocus training initially only on the areas mostcritical in getting a process started. Such areas asstrategic planning or inventory control can be leftfor a later date.

It is worthwhile remembering, when programmingtraining activities, that some of the persons beingtrained will not be available later on, whetherbecause of leaving their jobs, illness, or simplyvacations. It is therefore strongly recommendedthat, where finances and scheduling permit, atleast two – and preferably three - persons be sentto each training activity that takes place outside ofthe actual project, to insure the availability of asecond person.

As with the case of technical assistance, it isfrequently possible to find grant funds to pay, orat least subsidize, the cost of training for thepersonnel of small scale investments. If theinvestment proposal is not linked to a supportagency with this type of funds, it is worthcontacting the Ministries of Agriculture, RuralDevelopment or Economy, in addition to theNGOs active in matters of rural businessdevelopment, to see if there are grants or othersources of funds available.


Chapter IX

FINANCIAL ANALYSIS AND THE PREPARATION OF RECOMMENDATIONS


62

1. Annual Cash Flow

The annual cash flow largely avoids the problemof comparing costs in one year with benefits inanother year by evaluating costs and incomeseach year, using only cash costs and incomes. Thecost of the investment enters into this analysisthrough the payment of the loan taken out tofinance it.

The annual cash flow is calculated by adding allcash income from each year and subtracting allcash costs for the same year; the result is the netyearly income. Then subtract the cost of financing(capital and interest) from this result. If theremaining amount is still positive, then the projectwill generate sufficient income during that year tocover all production costs, as well as the costs ofcredit, and still leave some amount of profit (theremaining amount).

The annual cash flow is the measure of greatestinterest to the potential lender (bank, project,cooperative etc.), as it shows whether the projectwill be able to generate enough cash to pay allcosts and still meet the financing costs. It is alsotypically the measure most easily understood bythe applicants themselves, although they shouldunderstand that by taking only cash, thisapproach can miss out important costs andbenefits that are not in cash terms.

2. Financial Profitability

The cash flow measurement represents only asnap-shot of the cash position each year; it doesnot offer an overall evaluation of the project. It istherefore not very useful for comparing differentprojects, or for assessing a project against someform of benchmark. If a government, adevelopment project or even the applicant himselfor herself wishes to choose the most productiveuse for available funds, they will need a differentmeasurement This requires an evaluation of thefinancial profitability of the project.

A financial analysis takes the results of all of theyears under study and presents them in terms of asingle figure. However, to achieve this objective,the methodology must take the decreasing valueof money and the general benefits that occur withthe passage of time into account. How should thisanalysis be carried out?

We will use the following as an example: If aperson were offered the opportunity to invest in aproject in which the expense is US$1,000 today,but which generates an income of US$2,000tomorrow, there are few who would hesitate(assuming faith in the honesty of the projectmanagers). However, if the offer instead is an

IX FINANCIAL ANALYSISAND THE PREPARATIONOF RECOMMENDATIONS

F inancial analysis applies mainly to projectsdesigned to generate income. It is possible to

analyse social projects, environmental undertakingsor production support activity, by calculating andassigning artificial prices, but such ‘economicanalysis’ is generally far too complex for small ormedium scale projects 13.

For income generating projects, the profitability ofthe activity is the first and most important factordetermining sustainability, because no ‘comercial’project will survive which does not generateenough income to cover operating expenses andpay financial costs. However, there is more thanone way to determine the profitability of aninvestment. Each approach has its strengths andweaknesses. It is therefore convenient to use morethan one method.

It is also important to understand that the figuresgenerated through financial analysis are not veryuseful on their own; they need to be interpreted.It is the responsibility of the technician who carriesout the formulation and evaluation process for theproject to explain to the applicants, as well as tothe committee reviewing the application forfinancing, the significance of the results, as well asto combine the profitability calculations withother indicators of likely success and sustainability,such as the capability and commitment of theapplicants, the reliability of the market, thecomplexity of the technology, the environmentalimpact and the degree of organization of themanagement.

A. Measurements of the Investment’sFeasibility

Once all of the costs and incomes have beendetermined for the analysis period (whether 8, 12or 20 years), the following questions should beasked: What measurements will be used todetermine the feasibility of the investment, infinancial terms? How can we interpret theseresults?

There are two distinct measurements used in theRuralInvest models for this purpose, each havingits advantages and disadvantages. Together theyprovide a comprehensive vision of the proposedproject’s feasibility.

13 The prices calculated under economic analysis not only provide values for those inputs and products that have nomarket prices, but also frequently adjust market prices which do not adequately reflect the true value of the good orservice (due, for example, to taxes, protective measures, or minimum wage levels).


63

investment of US$1,000 to earn US$1,001 in 5 years, there would be no takers. The question,therefore, is to decide: What rate of return willmake it worth while to invest in a project? In otherwords, what rate of return represents a favourableinvestment and good use of the availableresources?

There are two main measurements that attemptto respond to this question: Net Present Value(NPV) and Internal Rate of Return (IRR). Both haveseveral key elements in common:

c They charge the total cost of the investmentin the year in which it takes place, so thatthe financing method and cost do not affectthe result of the analysis. Remember, thepurpose of the analysis is to identify agood project, not to select the bestfinancing option.

c They both include the value of the mainproject assets at the end of the analysisperiod (such as buildings, machinery andother substantial items). These are not incash, of course, and so are excluded fromthe annual cash flow analysis, but they areof value and should not be forgotten.

c They both place a value on self supply (e.g.unpaid family labour) and auto-

consumption (outputs used or consumedbut not paid for in cash).

c They adjust the value of future benefits insuch a way that a US$1 today is worth morethan a US$1 in one year, which in turn, willbe worth more than a US$1 in two years,etc. This process is called discounting thefuture benefits in comparison to benefitstoday.

a) Net Present Value

The simplest measurement is Net Present Value(NPV). After calculating the net annual income foreach year (as in the annual cash flow, but with thedifferences noted above), a discount rate isapplied to reduce the value of both net benefitsand losses in future years. Remember that adiscount rate is the opposite of an interest rate. IfI have $1, an interest rate of 10% will give me$1.10 in one year. By the same token, a discountrate of 10% will mean that $1.10 received a yearfrom now is worth only $1 today (its presentvalue). So, the NPV is a figure that represents thevalue of the project after discounting the netfuture benefits.

If for example I require an 8% interest rate on mymoney, then applying an 8% discount rate to the

46.30+50

96

89.16+50139.16

128.85+50178.85

165.61+50215.61

199.64+50249.64

249.64

250.00

-0.36

50Net income generated by project in Year 6:

Year 6 net income discounted to Year 5:

Net income generated by project in Year 5:

Total net income in 5th year









Total net income in 2nd year



Total net income in 1st year

Total Earnings

Initial Investment

Net Present Value:

NPV CALCULATION(Discount rate = 8%)

YEAR

10

-0.34

2 3 4 5 6


64

future net benefits of a project will ensure that Iget that return. If the amount left (the NPV) is 0,the project is generating exactly the 8% required.If the NPV is positive, I have obtained my requiredrate (the 8%) and have that sum as a bonus.When the NPV is negative, it means that theinvestment cannot yield the expected 8%; itwould have to earn (after discounting) anadditional amount equivalent to the NPV amountto reach break-even.

For example, let us imagine that a project in whichan investment of $250 results in six years ofbenefits of $50 each year, or a total of $300 (seeprevious page). It would appear that there is aprofit of $50. But this is true only if you do nottake the time-value of money into account. Ifinstead you apply an 8% discount rate you can seethat, in reality, the project is not very attractive.The NPV of the $250 investment is -$0.34. That isto say, if you require an investment to yield an 8%interest rate, it fails to meet this goal by anamount of $0.34.

Clearly, the critical aspect of the calculation ofNPV is the selection of the discount rate (orinterest rate). A high rate will result in the rejectionof more projects and will favour those projectsthat generate their earnings in the first years. Alow discount rate will normally result inacceptance of more projects and will give moreweight to the benefits generated in the moredistant future.

But, how do you choose the discount rate? Themost correct definition, as stated by the WorldBank, is that it is the rate equal to the increase inthe Gross Domestic Product (GDP) resulting fromthe investment of one additional dollar in a givencountry. So if a dollar causes an increase ofUS$1.07 in the GDP of the country in which youlive, the discount rate should be 7% - becausethen your investment will be equal to or betterthan the average for the economy as a whole.Such a definition, however, is easier said thanmeasured, because there is no easy way of makingthe necessary calculation.

For practical purposes, it is better to say that thediscount rate is the rate of annual net earnings(excluding inflation) that is required for aninvestment to be worth the effort. However, thisrate will not remain the same for all investors or allinvestments. It will depend greatly on thealternatives that are available and, even more, onthe risks that the project faces. An investor in a bigsolid bank would probably require a lowerdiscount rate on future earnings than someoneputting money into a petroleum explorationcompany, where rewards can be high butbankruptcy is always a possibility.

It has become customary in many cases to use8%, but any figure between 6% and 12% would

be acceptable. However, remember thatinvestments with high levels of risk need a higherrate of return, and that if few other uses can beidentified for the available funds, it might beacceptable to lower the rate.

b) Internal Rate of Return

The Internal Rate of Return (IRR) 14 uses amethodology very similar to that of the NPV. Thekey difference is that, in using the IRR, one isasking what discount rate (or interest rate) will thisinvestment support? If the IRR is 15%, that meansthat the initial investment will yield an interest rateof 15% over the life of the project.

Calculating the IRR is tricky, as one must first guessat the IRR, then run the NPV calculation and see ifthe resulting NPV is positive or negative. Theestimated IRR is then adjusted (up if the NPV ispositive, down if it is negative) and the calculationrepeated again. This goes on until the NPVreaches exactly zero. This then is the IRR.

Making these calculations used to be a mosttedious procedure, but nowadays the computerhas made it easy, doing in a second what theanalyst might have taken many minutes to do afew years ago.

B. The Impact of Taxes

The RuralInvest methodology places littleemphasis on the calculation of taxes, especially onthose related to income. Although these taxesmay prove important in well established andsuccessful projects (for example, in the case of anagro-industrial plant), they are irrelevant for thedetermination of the feasibility of smallinvestments. The problem that these projects faceis more one of survival than estimating taxes onearnings.

When dealing with other types of taxes (forexample, property taxes) the RuralInvestmethodology considers them simply as otherindirect or general costs and they should beincluded in the tables for these costs.

C. Preparation of Recommendations

A blind faith in the results of a financial analysis, asa guide to the approval of an investment proposal,is dangerous for the following reasons:

a) A computer can only process the data that isfed into it. Therefore the quality of thecalculation generated by the formatsdepends, to a large extent, on the quality of

14 Also called the Internal Financial Rate of Return, IFRR, to distinguish it from the Internal Economic Rate of Return, IERR


65

the information provided by the applicantsand their support technicians. In the realworld, very little information is 100%reliable. Estimations of prices, costs, volumesand duration can be wrong, in spite of thebest efforts of the persons involved. So it isimportant to remember that a financialanalysis represents the results uunnddeerr tthheeaassssuummppttiioonnss mmaaddee bbyy tthhoossee wwhhoo ssuupppplliieedd tthheeiinnffoorrmmaattiioonn.

b) A project that is profitable may be successful,but is in no way guaranteed to be a success.Even if the figures used for the calculation are reliable, a project can still fail. Amongother factors, problems arising from poorlycommitted participants, an ineffectivemanagement, or unexpected price changescan destroy a profitable project. Therefore, itis vital that you consider all of the factors thatmay influence the success of the investment,and not only the financial profitability.

How can these risks be recognized and taken intoaccount in presenting the results of theevaluation? First, it is crucial to take advantage ofthe considerable speed and power of thecomputer. Once the data have been entered it isvery easy to test alternative possibilities withouthaving to repeat all the earlier work. One canimmediately see the impact of a change,sometimes by altering a single number. This iscalled "sensitivity analysis" and its purpose is toindicate how the results of the study will changewith small changes in the assumption made.

For example, if a product has an average price of$10, what will happen if the price drops to only $8If the profit disappears completely (or evenbecomes a loss), you know that the profitability ofthe investment depends very closely on the priceof the good or service it produces and sells. Thesame procedure can also be used for a non-profitproject. How would the running costs of acommunity health clinic be affected if the numberof patients attending were lower than expected? Ifthe community relies on a standard subsidy perpatient from the Ministry of Health, then lowerthan expected patient numbers might mean theclinic can not meet its overhead costs (nurse,lighting, repairs etc.) and has to close down.

To make a sensitivity analysis, the technician must:

a) Identify those elements of the project forwhich: (i) doubt exists as to the correctnumber to use (e.g. should the price be 6, 8or 10), and (ii) which are expected to be ofimportance to the project (there might bedoubt over the price of paperclips, but itwould probably not be worthwhile testingthe impact of this change on project

performance). Commonly, such elementsinclude: prices of outputs, number ofanticipated users, cost of inputs; productionvolumes, the efficiency of the productionprocess (i.e. how much input is needed toproduce 1 kg. of output), the time neededto start-up or yield (in the case, for example,of tree crops) and once production isunderway, the time needed to reach the fullproduction level.

b) Determine a likely range of possibilities for each factor. For example, for a priceanalysis, one might say that, although theaverage price is $10, the possible range isfrom $7 to $12.

c) Insert new figures into the RuralInvestcomputer tables and note the results. The best way of presenting the results is to organize the figures into a chart,demonstrating the profitability of theinvestment for each factor (price, cost, etc.)with average, pessimistic and optimisticassumptions, but this is not essential.

d) In the transmittal letter that must accompanythe detailed analysis, the analyst shouldidentify those factors for which the project ismost sensitive and indicate how variations inthese factors might change the profitabilityof the investment, for example:

"Although the proposal to install an irrigationsystem looks quite profitable, it must be notedthat it is very sensitive to variations in theyields of the vegetables grown. If, instead of12 metric tons per hectare (mt/ha), only 10mt/ha are obtained, the project becomesmarginal. If the yield drops further to 9 mt/haor less, the investment ceases to be profitable."

e) When a proposal shows high sensitivity tochanges in key factors, the technician’sreport should consider the probability ofthese variations occurring, for example:

"However, the applicants have extensiveexperience in growing vegetables andalready obtain yields in excess of 12 mt/ha inthe few areas where there is now access towater during the summer. The risk of lowerthan expected yields is not thereforeconsidered to be very high".

The steps described above insure that the peopleconsidering the financing proposals have theinformation that they need to make an informeddecision.

With respect to the relative importance of financialand other factors in project success, it is theresponsibility of the technician in charge of


66

formulation and evaluation to carefully considerand identify any other aspect of the proposal thatcould influence in its feasibility, and not rely solelyon the financial analysis. The transmittal letter forthe proposal should make reference to the abilityof the applicants to manage and administer theinvestment, to the sustainability of the project, interms of environmental impact and the utilizationof resources and the risks that the investmentmight encounter.

Remember, you are doing no one a favour byrecommending an investment that does not havea good possibility of success. Where the project isfinanced with credit, a failure can leave a group orcommunity in debt, with no possibility of payingit off (probably restricting its access to financing inthe future). Even in the case of a project that onlyuses donated funds, you must remember thatevery failure means that there was another goodproject that was unable to obtain the resources itneeded for success.

The procedures explained in this chapter largely assume that the proposed investment is completelynew, and thus all costs and income will be directly attributable to the project. This is certainly thesimplest case. But what if the investment is applied to an earlier, existing activity where there arealready costs and revenues? How can the impact of the new investment be properly reflected in thefinancial analysis? The answer is that, where the proposed investment will give rise to changes in anexisting activity, it is necessary to look at costs and revenues both with and without the new project.

Take, for example, the case of a group currently growing melons on a 3 hectare field. They wish toinstall a pump which will bring water from a nearby stream during the dry season to providesupplemental irrigation. Clearly the cost of purchasing and operating the pump are new costs, butwhat about the actual production? As more water is available, it may be worthwhile adding morefertilizer and other nutrients, to allow the melon plants to make full use of the new supply. Currently,the group is applying 2.5 bags of fertilizer per hectare, but the group decides to increase this to 3.5bags if water is available. The incremental fertilizer usage would thus be 1 bag/ha, and theincremental cost would be the price of 3 additional bags (for 3 hectares). Equally, yields are currently5 tons/ha, but the group is confident that this can be increased to 8 tons/ha with irrigation.Incremental revenue is thus 3 tons per hectare, or 9 tons in total, times the price per ton received forthe melons. Other incremental costs incurred by the new project may arise from changes in theamount of seed sown, the increased number of melons to be harvested, and the increased numberof bags or boxes needed for packaging.

Remember, if you apply all costs and income anticipated after the new investment, you may wellcome up with the wrong answer as to the profitability of the additional investment. In the case above,it is important to compare only the incremental costs (the pump and additional fertilizer etc.) withthe incremental output of 9 tons of melons. If fuel for the pump is expensive, or if the projectedincrease in yield is small, it is not impossible that the group would be better of without irrigation, butthey can not know unless they use incremental costs and revenues.

Investing in an Existing Activity – the Importance of Incremental Costs and Revenues


Chapter X

PREPARATION FOR THE INVESTMENT AND BEYOND


68

PREPARATION FORTHE INVESTMENT ANDBEYOND

It would be very unfortunate if the support givento a community, group or individual applicant

were to end with the presentation of theinvestment proposal to the financing agency.Although this may have seemed to be the finalgoal while formulation was underway, in reality itis just the beginning.

Between the formulation of an investmentproposal and the actual launching of the project,lie many tasks that are extremely difficult forpersons who have no experience in negotiatingwith bankers, lawyers and government officials,(either municipal or from the centralgovernment, as is the case when applying forhealth permits). Even when these obstacles haveall been surpassed, there is still the enormouschallenge of making the investment functionsmoothly. If the group encounters a problemafter a few months of operation, where does itgo for help?

A. The Importance of Support andFollow-Up

In order to achieve a successfully functioningproject, it is vital that the small investors have areliable and accessible source of support andfollow-up during the preparation and start-upperiod. The best person to provide this support is,without doubt, the same person that helped thegroup identify and formulate the proposal. If forsome reason it is impossible for the fieldtechnician to continue with the group, he or shemay be replaced by someone else, but somesupport should always be made available duringthis critical period. If it is not provided, the entireeffort is at risk, because there is a good possibilitythat the project will never get underway as it wasconceived.

Among the most important tasks to be taken careof during this period, are the following.

(a) Helping the applicants to reaffirm theircommitment to the project and theirparticipation (especially in the case ofcommunity-based projects);

(b) Accompanying the applicants in financialnegotiations, the acquisition of legal permits,etc.;

(c) Support in preparing the start-up plan;

(d) Procurement or contracting of goods andservices needed in the investment and theirinstallation and supervision;

(e) Follow-up in the execution process.

Below, each of these tasks is described in detail.

B. Reaffirmation of the Commitmentof the Applicants

To ensure the applicants’ full commitment to thefinal project, it is first of all necessary to have theiractive participation throughout the process,starting with identification. As the final designemerges from the formulation process, it isimportant to verify that the group is both capableand willing to provide its contribution asstipulated in the final design, as and whenneeded, be it in cash, labour or in the supply ofmaterials. To evaluate this capacity and availability,the technician, working with the applicants,should conduct at least one meeting beforepresenting the final proposal to the financialagency, to explain it to the applicants and toinsure that the final product reflects theirintentions and interests.

He or she should conduct an additional meeting,once the formulation and evaluation process isconcluded, organized by the members of theapplicant group, at his request. One conditionthat the group must fulfil is attendance and thepersonal involvement of all adult members (men,and women of the participating families) in themeetings. As a result, they should develop anoutline of the plan of execution, which specifies:

c Necessary activities, deadlines and personsresponsible for their performance.

c Financial and material contributions bymembers of the group.

C. Accompanying the Applicants inFinancial Negotiations and SeekingLegal Permits.

The field technician, with the approval of theapplicant group, should make contact with thefinancial institutions that collaborate in theprocess of investment. This could involve periodicconsultations with the financing agency on theprogress of the proposals in formulation, or mayrequire only a single presentation uponcompletion of the detailed proposal. However,once the formulation and evaluation phase iscompleted, the technician is responsible foradvising the applicants as to any specific

X


69

administrative requisites of the financial agency.This might include, for example, attaching avariety of legal documents relating to theapplicants to the investment proposal.

The financing agency may also require theapplicants, or at least their selectedrepresentatives, to attend a formal meeting for thereview of their application, and they should besupported at this meeting by the technician. He orshe may also help by gathering information onlegal aspects, or assisting them in filling outmandatory forms.

It is possible that the group may need guidanceon selecting between alternative financial options.

D. Support in Preparing a Start-up Plan

Whether during the detailed formulation andevaluation phase, or during the resourceprocurement stage, the field technician, shouldassist a working group, chosen by the applicantgroup itself, to prepare a plan for theimplementation of the project, based on theinvestment proposal. This plan must contain:

c Overall guidelines as to the timing andobjectives of the implementation process;

c A listing of the specific activities needed andtheir schedule of implementation;

c The identification of the persons responsiblewithin the applicant group for theseactivities;

c Any organizations or institutions which havepromised to provide technical support indifferent activities;

c The exact financial and materialcontributions to be made by members ofthe group for the different activities, and thetiming of these contributions;

c Indicators for monitoring of theimplementation process, including book-keeping and measuring physical quantities(where relevant).

It is essential that the groups be provided withadequate training on the administration of funds.Among other tasks, the field technician mightadvise them on aspects of accounting and generaladministration. Alternatively, he or she might actas an intermediary in obtaining such assistancefrom another advisor.

Once the project is underway, the technician willnormally only make periodic visits to follow up onthe progress of the investment. In particular, it isimportant to try and identify problems before

they cause serious difficulties and help the projectmembers to obtain appropriate advice on how todeal with these problems. In this regard, it isrecommended that the agency sponsoring theinvestment process, keep a register of specialistadvisors from governmental and non-governmental institutions to which projects withproblems can turn.

Such a register of approved advisors can serve asa powerful tool, by laying down specificrequirements for those who wish to offer theirservices. Those wishing to be listed in the registercan be required, for example, to participate inRuralInvest training, and those who performpoorly can be removed from the register (thislatter procedure makes it necessary for the work ofeach advisor to be evaluated by projectmembers). However, the significance of theregister can be even more important; having a listof approved experts will allow the sponsoringagency to leave in the hands of the applicantgroup the selection of the person they want, andthereby, strengthen their participation in theprocess.

E. Purchase and Contracting of Goodsand Services

The financial agency will probably haverequirements and standards for the procurementof goods and services, for example, demandingthree quotes and a transparent selection process.Even if such established procedures are missing, itis important that the applicants follow a clearprocess of identifying, evaluating and selectingvendors and service providers. Furthermore, theremust be norms for the monitoring and control ofthe activities carried out by the contractors,including procedures for materials control,register of advances and certification of the timededicated to the job by the contractor and histeam.

F. Follow-Up to the ImplementationProcess

Each agency or financing project should have itsown methodology for the process of follow-up onthe implementation of the investment. Theimportant aspect is that it have a methodology.Investments that are begun without some form offollow-up will be more likely to fail, in comparisonwith those that receive support and advice.

In many cases, project participants will needtraining in accounting and in the local laws, inmatters concerned with taxes, health permits, andsocial benefits for employees, among other things.


70

Frequently, project managers will need training inplanning, marketing and similar subjects. If theproject involves the management of productionprocesses, it is possible that there will be technicalproblems during the first year of operations.

There are two general models for handling thistype of support. The first is to continue with thefield technician or community promoter, playingthe role of "family doctor"; this means that thetechnician visits the community or investmentevery month or six weeks and keeps an eye on theprogress of the work. If a problem comes up, it isthe responsibility of the technician to request theapproval of the financial agency or the sponsor, to

use specialized consulting and to select, or to helpthe investors to choose, the right person for thework required.

The second model, is to contract a localconsulting firm, NGO or other group to take onthe total responsibility for supporting the projectmembers during a period of one or two years.With a set amount of resources available, theadvisors arrange for all of the support the groupneeds. On a more sophisticated level, it should bepossible to relate the remuneration received bythe advisors to the success of the investment,although, in practice, this arrangement is not thateasy.


ANNEXES

ANNEXES


72

Appendix 1a: EnvironmentalCategorisation of Projects

The following is an indicative list of investmenttypes that could be included within the fourenvironmental impact categories described inChapter 5.

It must be noted that the list is only a guide forassessing each project, without loosing sight of itscharacteristics and merits. It is recommended that,before starting RuralInvest use, environmentalexpert advice is sought on how to apply thesecategories in the project area. It is also stronglyrecommended that a program of training andtechnical assistance in environmental assessmentbe designed and implemented, to improve theunderstanding of field technicians on the meaningof these categories. This would enable thetechnicians themselves to propose modificationsin the classification to ensure the inclusion of localproductive systems and hence the incorporationof appropriate environmental mitigation measuresinto project design.

For Category A:

Projects in which no or negligible adverse effects on the environment are foreseen andwhich, consequently, require no environmentalmitigation measures.

- Soil conservation activities, for the purposeof improving farmland productivity, henceavoiding the conversion of forests intocropland/pasture;

- Controlled experimentation (agricultural/pastoral/forestry) for research purposes anddemonstration in small parcels, except inhighly sensitive areas 1;

- Small-scale organic agriculture 2;

- Cultivation of permanent crops under theforest canopy that does not involvepesticide use;

- Sustainable harvesting 3 of non-wood forestproducts 4;

- Construction of rural warehouses, if limitedto small collection centres for the storage ofgrains or other agricultural products,community stores and structures for harvestdrying;

- Initiatives for integrated micro-watershedmanagement;

- Small-scale initiatives on the conservationand sustainable use of biodiversity.

For Category B:

Projects with possible low adverse environmentalimpacts, which can readily be mitigated. In thiscase, a detailed identification of the possibleenvironmental impacts has to be made andmitigation measures incorporated in projectdesign (see section D of chapter 5).

- Small or medium-scale agricultural and/orpastoral activities in areas with no or littleconstraints of slope (e.g. cultivated soils onslopes not greater than 6%) 5, rockiness,drainage, effective depth, water availabilityand/or soil fertility;

- Agroforestry associated with annual crops 6

in areas with little constraints of slope (e.g. cultivated soils on slopes not greaterthan 6%), rockiness, drainage, effectivedepth, water availability and/or soil fertility;

- Agroforestry associated with perennial cropsin areas with moderate constraints of slope(degree of slope less than 10%), rockiness,drainage, effective depth, water availabilityand/or soil fertility;

- Construction or rehabilitation of small-scaleirrigation infrastructure for areas up to e.g.50 hectares;

- Pasture management on natural pastures;

1 Highly sensitive area refers to ecologically sensitive sites such as areas with steep slopes (more than 10 degrees), riparianvegetation, vegetation around springs, critical habitats for local species, etc.

2 However, in the case of organic coffee, category A is only applicable when the producers do not use wet coffeeprocessing methods, which can cause river and stream pollution.

3 Sustainable harvesting refers to the extraction of plants and other resources from forests which does not affect theavailability of these resources in the long term and does not damage the ecological integrity of the forest.

4 Non-wood forest products (NWFP) include products used as or with food (e.g. fruits, mushrooms, nuts, herbs, spices,cacao, honey, and animals hunted for meat), fibres (such as rattans), rubber, resins, gums, and plant or animal productsused for medicinal, cosmetic or cultural purposes. They can be gathered from the wild, or produced in forestplantations, agroforestry schemes and trees outside forests. NWFP are vital to the daily subsistence of forest-dependentcommunities, and contribute to the subsistence and local commercial economy in other rural communities. SomeNWFP are also commercialised in a larger scale (e.g. cork).

5 Source: Jain, Urban, Stacey, Balbach: Environmental Assessment. MacGraw-Hill, 1993, p.90/373.

6 Systems of permanent plantings associated with trees (isolated into blocks or plantations, whether these be fruit speciesor others for the purpose of lumber and other forestry products).


73

- Community forestry;

- Rehabilitation planting (with native species)in areas that have been deforested;

- Eco-tourism;

- Construction or rehabilitation of minor ruralroads and bridges (within farms) which donot cross ecologically sensitive areas 7;

- Establishment or improvement of small-scaleagro-industries (e.g. processing of milkproducts with an average daily consumptionof less than 100 lt. of milk, meat processingwith an average daily output of less than 50 kg of meat, wet coffee processing withless than 1,500 cwt. of coffee berries perweek);

- Small-scale artisan workshops, includingsmall clothing and textile workshops (e.g. silk screen printing done by hand);

- Establishment or improvement of small-scaleaquaculture activities (e.g. total area ofponds less than 0.5 hectare);

- Construction or improvement of small-scalewater supply and sanitation infrastructure(less than 100 persons) 8;

- Construction or rehabilitation of smallschools or health centres (if not located inecologically sensitive areas).

For Category C:

Projects with possible moderate or significantadverse environmental impacts, but wheremitigation is possible. These projects require anenvironmental assessment, undertaken by anenvironmental specialist, and detailed mitigationmeasure proposals have to be incorporated in theproject design. Commissioning of specialisedenvironmental studies on critical aspects, or a fullEnvironmental Impact Assessment (EIA) may benecessary.

- Controlled and regulated exploitation oftimber and other wood products of a forest 9;

- Small/medium-scale agricultural and/orlivestock activities in areas with strong (but not severe) constraints of slope (degreeless than 10%), rockiness, drainage,effective depth, water availability and/or soilfertility;

- Agroforestry involving with annual crop-treesystems in areas with strong (but notsevere) constraints of slope (degree less than10%), rockiness, drainage, effective depth,water availability and/or soil fertility;

- Construction or rehabilitation of medium-scale irrigation infrastructure for areas ofmore than 50 hectares;

- Purchase and use of pesticides, other thanthose listed in Table 1, or project activitiesthat are likely to increase pesticide use (e.g.construction of irrigation schemes,establishment of orchards, etc.) (see alsocategory D);

- Construction or rehabilitation of small ruralroads and bridges which do not crossecologically sensitive areas 10;

- Establishment or improvement of medium-scale agro-industries (e.g. processing of milkproducts with an average daily consumptionof more than 100 lt. of milk, meatprocessing with an average daily output ofmore than 50 kg of meat, wet coffeeprocessing activities with more than 1.500cwt. of coffee berries per week, palm oilmills, wool scouring);

- Medium-scale textile industry (e.g. silkscreen printing done by machine in lessthan 100 m2 / day);

- Small-scale artisan workshops involving fibredying and tanning;

- Saw-mills and processing plants for forestryproducts;

- Establishment or improvement of medium-scale aquaculture activities (total area ofponds more than 0.5 hectare);

- Construction or improvement of watersupply and sanitation systems (e.g. for morethan 100 persons);

- Establishment or improvement of solidwaste collection and disposal structures;

- Initiatives in the buffer zones/multiple usagezones of protected areas;

- Initiatives that might affect endangeredspecies (e.g. introduction of exotic species)or negatively affect their habitat (tropicalforests, mangrove swamps and otherwetlands, etc.).

7 Highly sensitive area refers to ecologically sensitive sites such as areas with steep slopes (degree more than 10%),riparian vegetation, vegetation around springs, critical habitats for local species, etc.

8 Source: World Bank Environmental Guidelines for Social Funds; D. Graham et. al, 1998).

9 These activities may be counterproductive unless they have an adequate Management Plan, approved by anenvironmentally competent institution.

10 Highly sensitive area refers to ecologically sensitive sites such as areas with steep slopes (degree more than 10%),riparian vegetation, vegetation around springs, critical habitats for local species, etc.


74

For Category D:

Projects with potentially significant adverseenvironmental effects, for which there are noeffective mitigation measures, or projects whichare incompatible with the sustainabledevelopment policies of the country or ofinternational development agencies. In this case,the project has to be completely reformulated orexcluded from financing.

- Agricultural activities that involvedeforestation and/or conversion of forestedareas into farm and/or pasture land(whether they be deforestation of primaryforests 11, deforestation of natural or artificialforests established for protection purposes(including the protection of riverbanks andslopes), or cutting of trees around ponds,springs or artesian wells, puddles andnatural or artificial lagoons, archaeologicalsites, etc.);

- Forestry activities that involve deforestationor exploitation of wood products fromnatural forests, except when these areconsistent with the Forest Management Planapproved by the competent forestry orenvironmental institution;

- Colonisation in primary forests;

- Exploitation of trees from mangroveswamps;

- Construction, improvement andmaintenance of roads that pass throughunexploited natural forests;

- Any activity in strictly protected areas suchas nature reserves, national parks, and corezones or rehabilitation zones of protectedareas;

- Initiatives that might significantly affectendangered species or negatively affect theirhabitat;

- Changes to less sustainable agriculturalsystems such as the transformation ofshade- covered coffee plantations intounshaded plantations;

- Agricultural activities involving the plantingof annual crops in areas with severeconstraints (steep slopes (more than 10degrees) etc.);

- Purchase and use of pesticides classified bythe World Health Organization as ExtremelyDangerous (Class Ia) and Highly Dangerous(Class Ib), see Table 1;

- Purchase and use of pesticides classified bythe World Health Organization asModerately Dangerous (Class II) if (i) thecountry lacks restrictions on theirdistribution and use, or (ii) they are likely tobe used by, or accessible to, lay personnel,farmers, or others without training,equipment, and facilities to handle, store,and apply these products properly;

- Purchase and use of pesticides over largeareas.

11 Natural forests in pristine conditions, undisturbed by humans.


75

Table 1. Pesticides classified by the WorldHealth Organization as Extremely Dangerous(Class Ia) and Highly Dangerous (Class Ib)

The users of this table should note that the actualhazard classification of a formulated pesticideproduct available on the market depends on anumber of factors, including the toxicity of theactive ingredient, its concentration, and thephysical state of the product (liquid or solid). Theactual classification of the formulated productshould be provided on the label. In many - but notall! - cases, it will be the same as the classificationof the active ingredient. The table below providesan initial indication of the hazard classification ofactive ingredients ("common name") andformulated products ("trade names andtrademarks").

The list of trade names and trademarks arecommonly available products. Particularly indeveloping countries, there may be other tradenames that are not on this list. The list shouldtherefore not be considered as exhaustive butrather as a list of examples.

It should also be noted that, in addition to theextremely and highly dangerous pesticides listedin this table, World Health Organization classifiesmoderately hazardous pesticide formulations inClass II. Even if less hazardous than Class Iproducts, use of Class II pesticides still requires ahigh degree of precautions and may cause lethalor otherwise severe poisoning if used improperly.Preconditions for the use of Class II pesticidesinclude: (i) adequate and enforced legalrestrictions on their distribution and use; (ii)safeguards to prevent the use of, and access to,these pesticides by lay personnel, farmers, orothers without appropriate training, equipmentand facilities to store and apply them properly;and (iii) user adherence to precautionary methodsproven effective under field conditions indeveloping countries.

The final column of the table includes some of themost common trade names and trademarks usedby basic producers and formulators of pesticides.It is based on information contained in theMeisterPro Version of the Farm ChemicalsHandbook (Electronic Pesticide Dictionary),edition 2001.


76

name*

I-S

R

R

R

FM

F

I

I

R

R

R

R

I

I

I-S

R

I-S

FST

F-S

I

I

I

FST

I

I

R

I

I

I-S

Trade name or trademark

Aldicarbe, Temik, Sanacarb

Brobait, Forwarat, Havoc, Micedie, Mr. Morton, Nofar, Sorexa, etc.

Acilone, Atila Pellets, Bromalone, Killrat, Lafar, Obamice, etc.

Vengeance

-

Santar, Foltaf

Fortress

Dotan, Sherman

Actosin, Lepit, Dicusat, Trokat Bait, Ramucide, Ratomet, Raviac, Topitox, etc.

Frunax-DS, Neosorexa, Sorexa

-

Diphacin, Promar, Ramik, Tomcat, etc.

Ekatin, Disyston, Bay 19639, Disultex, Disulfoton P10, etc.

-

Mocap, Fertiprophos, Vimoca, Rifenfos

Storm, Stratagem,Kukbo Coumafen

Dytonato

Bent-cure, Bent-no-more, No Bunt

-

Phosdrin, Duraphos, Mevidrin

Alkron, Ekatox, Folidol, Rhodiatox Paration Metilico, Chimac Par H, Pox Konz, Woprophos, Alleron, Aphamite, Corothion, Etilon, Orthophos, Panthion,Paramar, Phoskil, Soprathion, Stathion, Fighter, etc.

Cekumethion, Fulkil, Metacide, Bladan M, Folidol M, Metacide, Amithion,Agrodol, Paration Metilico, Agro-Parathion, Vitamethion, Penncap-M,Folidon, Devithion, Dhanudol, Dhanumar, Pox M20, Metpar-200, Fosforin'M,Bration, Methion, Kildot, Korthion, Parathol, Faast, Dipathio M, Vegfru Klofos,Probel MP-35, Proficol, Woprophos- M, Parasul, Gearphos, Metaphos,Partron M, Tekwaisa, etc.

-

AC 3911, Granutox, Thimet, Agrophor, Frotox, Dhan, Chimifor, Pestophor,Chim, Tuskar, Phoril, Kurunai, etc.

Dimecron, Phosron, C 570, Fosfamid, Alfamidon, Chemphos, Devimidon,Phos-All, Pradhan, Mitekron, Midon, Phos-Sul, etc

-

Bladafum, Dithio, Thiotepp

-

Plydax, Contrave, AC 92100, Turbolux, Contraven, Counter, Biosban, Pilarfox,Terborox, Tertin, Fortune-T1, etc.

Common name

aldicarb

brodifacoum

bromadiolone

bromethalin

calcium cyanide

captafol

chlorethoxyfos

chlormephos

chlorophacinone

difenacoum

difethialone

diphacinone

disulfoton

EPN

ethoprophos

flocoumafen

fonofos

hexachloro-benzene

mercuric chloride

mevinphos

parathion

parathion-methyl

phenylmercuryacetate

phorate

phosphamidon

sodium fluoroacetate

sulfotep

tebupirimfos

terbufos

CLASS 1a

* AC = acaridicide, FM = product for fumigation, F = fungicide, FST = fungicide for treatment of seeds, H = herbicide,I = insecticide, L = larvicide, MT = miticide, N = nematocide, O = other use for plant pathogens, R = rodenticide, S = applicable to the soil.


77

Use*

H

H

I

I

F

I

I

N, I

I

I

I

R

AC,MT

R

I

I

I

I

H

I-S,H

F

I

I

I

R

AC

I-S

I

I-S

I

I

L

I

O

I


Aqualine Magnacide

-

Bay 16259, Gusathion, Sepizin L, Crysthion

Azimil, Azinugec, Carfene, Metazintox, Sepizin M, Pancide, Gusathion,Guthion, Azinfosmetil, Agrothion, Chimithion P.B., Crysthyon, Cotnion'H,Azin, Azition, Mezyl, Probel G-20, etc.

Bas-S

-

Plant Pin, Co 859

Apache, Taredan, Rugby

Spra-cal, Turf-Cal

Carbodan, Carbosip, Yaltox, Rampart, Furacarb, Vitafuran, Curaterr, Diafuran,Chemfuron, Fertifuran, Furasun GR, Carbo-Tox, Carboter, Damira, Caribo,Curasol, Fury, Volfuran, Furadan, Woprofuran, Buraon, Furasul, Thodfuran,etc.

Birlane, Supona, Steladone

-

Asuntol, Co-Ral, Penzin

Racumin, Kukbo Stunt

-

Metasystox, DSM, Mifatox, Metaphor

Aminatrix, Canogard, Dedevap, Mafu, Acivap, Agrona, Cazador, Agro-DDVP,Dichlorate, Vitavos, Ouo, Cekusan, Nuvachem, Devikol, Domar, Didivane,Foravap, Didifos, Hercon Vaportape II, Hilvos, Kilvos, Koruma DDVP, Stevie,Novos, Midiltipi DDVP, D.D.V. Paz, Vantaf, Woprylphos, Rupini, Dadasul, DeDe Vap, Tazusa, etc.

Bidrin, Dicron, Ektafos

Herbogil

Hercynol, Trifinox, Polartox, etc.

Blastoff, Hinosan, Bay 78418, Edisan, Vihino

Croneton

-

Cybolt, Cythrin, Pay-Off, Fluent

Rhodex, Fluorakil, Navron, Yanock

Carzon, Dicarzol

Deltanet, Promet

Hoe 02982, Hostaquick, Ragadan

Miral, Triumph, Victor

Bay 12869, Oftanol, Lighter

Karphos, E-48

Gypsine, Soprabel, Afos

-

-

Tamaron, Monitor, Bay 71628, Tam, Sinator, Amiphos, General, Metamidofos,Agromon, Vitaphos, Nuratron, Sherman, Tamanox, Erkuron, Matón, Amidor,KASA, Metalux, Metaron, Metafós, Methamidopaz, Woprotam, Thodoron,Vetaron, etc.

Common name

acrolein

allyl alcohol

azinphos-ethyl

azinphos-methyl

blasticidin-S

butocarboxim

butoxycarboxim

cadusafos

calcium arsenate

carbofuran

chlorfenvinphos

3-chloro-1,2-propadeniol

coumaphos

coumatetralyl

zeta-cypermethrin

demeton-S-methyl

dichlorvos

dicrotophos

dinoterb

DNOC

edifenphos

ethiofencarb

famphur

flucythrinate

fluoroacetamide

formetanate

furathiocarb

heptenophos

isazofos

isofenphos

isoxathion

lead arsenate

mecarbam

mercuric oxide

methamidophos

CLASS 1b


78

Use*

I

I

I

I

I

I

I

L

I,F,H

R

I

I

I

R

R

R

I-S

R

I-S

I

I

I

R

R


Supracide, Supra, Supradate, Datimethion, Medacide, Bumerang, Ultracidin, etc.

Draza, Mesurol

Flytec, Dupont 1179, Kipsin, Lannate, Aldebaran, Acinate, Metholate, Avance,Dumil, Dunet, Memilene L, Lanox, Fertiomyl, Matador, Dynamil, Lanomac,Lanomed, Methopaz, Metopron, Methylan, Agrinate, ect.

Azodrin, Nuvacron, Susvin, Aminophos, Monoglen, Monocrotofos,Monacron,

Aimocron, Monochem, Devimono, Monodhan, Crisodrin, Foradrin, Hukron,Atom, Agrodrin, Inisan, Kilphex, Hazodrex, Luxafos, Monofos, Azakron,Milphos, Agrophos, Cropaphos, Monolex Lucadrin, Croton, Woprotect, R CPos, Monosul, Thodocron, Vacron, etc.

Nico Soap

Folimat, Modern, Le-mat

Blade, Vydate

Aimcosystox, Anthonox, Metasystox R, Oxydemetchem, Dhanusystox, MSR2,Mesh

-

Pentacon, Sinituho, Penchloral

-

Solgard, Primicid

Kayaphos

Catalyst, Blotic, Safrotin, Seraphos

Arsenipron L, Prodalummol Double

Cyanogas A

-

Attack, Forca, Forza, Force, Komet

-

Decamox, Dacamox

Ekatin, Bay 23129, Thiotox

Hoe, Hostahion, Able, Fulstop, Triumph, Trelka, Trihero, Try, Sutathion,Perfect, Tries

Kilval, Trucidor

Dicusat E, Luxarin, Ramorin 2, Woprodenticide, Warfotox, Cov-R-Tox,Rodex, Tox-Hid

Deviphos, Fastkill, Zinphos, Fokeba, Phosvin, etc.

Common name

methidathion

methiocarb

methomyl

monocrotophos

nicotine

omethoate

oxamyl

oxydemeton-methyl

paris green

pentachlorophenol

pindone

pirimiphos-ethyl

propaphos

propetamphos

sodium arsenite

sodium cyanide

strychnine

tefluthrin

thallium sulfate

thiofanox

thiometon

triazophos

vamidothion

warfarin

zinc phosphide

CLASS 1b

* AC = acaridicide, FM = product for fumigation, F = fungicide, FST = fungicide for treatment of seeds, H = herbicide, I = insecticide, L = larvicide, MT = miticide, N = nematocide, O = other use for plant pathogens, R = rodenticide, -S = applicable to the soil.


79

Appendix 1b: Checklists for Environmental Assessment


80

IMPA

CT

S

Cul

tiva

tio

n o

f an

nua

l cro

ps

usin

g p

loug

hin

g:

Win

d an

d w

ater

ero

sion

due

to

plo

ughi

ng;

Wat

er e

rosi

on d

ue t

o sl

ope;

Loss

of

soil

fert

ility

.

Cul

tiva

tio

n o

f g

rain

cro

ps

usin

g h

oe:

Loss

of

soil

fert

ility

and

pro

lifer

atio

n of

wee

ds d

ueto

sho

rten

ed f

allo

w p

erio

ds;

Wat

er e

rosi

on d

ue t

o sl

ope.

Mo

no

cult

ures

:

Prol

ifera

tion

of p

ests

;

Soil

and

wat

er c

onta

min

atio

n re

sulti

ng f

rom

inte

nsiv

e p

estic

ide

use;

Soil

dep

letio

n;

Wat

er c

onta

min

atio

n re

sulti

ng f

rom

inte

nsiv

efe

rtili

zer

use.

MIT

IGA

TIO

N M

EASU

RES

Con

serv

atio

n A

gric

ultu

re b

ased

on

inte

grat

ed p

ract

ices

suc

h as

zero

till

age,

min

imum

till

age,

cro

p r

otat

ion

and

per

man

ent

soil

cove

r (f

or m

ore

deta

ils,

see

FAO

Con

serv

atio

n A

gric

ultu

rew

ebsi

te:

http

://w

ww

.fao.

org/

ag/a

gs/A

GSE

/Mai

n.ht

m;

Strip

cro

pp

ing

or c

onto

ur p

lant

ing,

by

i) di

rect

see

dlin

g, e

.g.

byp

lant

ing

coco

a m

othe

r tr

ees’

see

ds in

the

fur

row

s, o

r ii)

cont

ourin

g w

ith g

rass

(p

refe

rabl

y na

tive)

;

Eart

h bu

nds,

sto

ne li

nes,

con

tour

ter

race

s (u

sing

roc

ks,

trun

ks,

etc.

);

Prot

ectio

n of

cul

tivat

ed p

lots

with

fen

ces,

bor

der

gras

ses

and

win

dbre

aks.

Incr

ease

d fa

llow

per

iods

;

Use

of

com

pos

t an

d/or

gre

en m

anur

e (u

sing

legu

mes

) in

rot

atio

nw

ith g

rain

cro

ps

(e.g

. ve

lvet

bea

n in

rot

atio

n w

ith c

orn

imp

rove

sco

rn y

ield

s, p

rote

cts

the

soil

from

ero

sion

and

fro

m e

vap

orat

ion,

and

pre

vent

s th

e gr

owth

of

wee

ds;

besi

des,

har

vest

res

idue

isex

celle

nt f

odde

r);

Inte

r-cr

opp

ing

with

legu

min

ous

tree

s an

d or

ann

ual l

egum

inou

scr

ops;

Enric

hed

fallo

w w

ith le

gum

inou

s cr

ops.

Cro

p d

iver

sific

atio

n p

ract

ices

, in

ter-

crop

pin

g, r

elay

cro

pp

ing;

Cro

p r

otat

ion

pra

ctic

es;

Inte

grat

ed P

est

Man

agem

ent

(IPM

): s

ee b

elow

;

Cul

tivat

ion

of n

itrog

en f

ixin

g sp

ecie

s (e

.g.

legu

min

ous

pla

nts

that

fix n

itrog

en in

the

soi

l);

Use

of

gree

n m

anur

e.

MO

NIT

OR

ING

IN

DIC

AT

OR

S

Cha

nge

in t

he h

eigh

t of

roo

t p

edes

tals

;

Acc

umul

atio

n of

silt

/san

d at

the

foo

t of

bus

hes,

pos

ts a

nd f

ence

s, a

s w

ell a

s in

dow

nstr

eam

wat

erbo

dies

;

Dep

th o

f ril

ls/g

ullie

s;

Cha

nges

in y

ield

s an

d to

tal p

rodu

ctio

n;

Cha

nges

in t

he s

oil's

wat

er r

eten

tion

cap

acity

;

Dat

a on

sed

imen

t lo

ads

in s

trea

ms

and

dam

s if

avai

labl

e fr

om a

nea

rby

hydr

olog

ical

sta

tion.

Cha

nge

in h

umus

con

tent

of

soil;

Cha

nge

in t

he h

eigh

t of

roo

t p

edes

tals

;

Dep

th o

f ril

ls/g

ullie

s;

Cha

nges

in y

ield

s an

d to

tal p

rodu

ctio

n;

Dat

a on

sed

imen

t lo

ads

in s

trea

ms

if av

aila

ble

from

a ne

arby

hyd

rolo

gica

l sta

tion;

Ap

pea

ranc

e or

dis

app

eara

nce

of w

eeds

.

Ap

pea

ranc

e or

dis

app

eara

nce

of p

ests

;

Pest

man

agem

ent

pra

ctic

es,

incl

udin

g us

e le

vels

of

pes

ticid

es;

Are

a of

bar

ren

land

;

Cha

nge

in t

he h

eigh

t of

roo

t p

edes

tals

;

Dep

th o

f ril

ls/g

ullie

s;

Cha

nges

in y

ield

s;

Sedi

men

t lo

ads

in s

trea

ms

if da

ta a

vaila

ble

from

ane

arby

hyd

rolo

gica

l sta

tion.

TAB

LE 1

- C

rop

cul

tiva

tio

n:

Prac

tice

s as

soci

ated

wit

h e

nvi

ron

men

tal r

isks

. Po

ssib

le a

dve

rse

imp

acts

, m

itig

atio

n m

easu

res

and

ind

icat

ors

fo

r m

on

ito

rin

g.


81

IMPA

CT

S

Use

of

pes

tici

des

:

Con

tam

inat

ion

of s

oil,

surf

ace

and

grou

nd w

ater

;

Ap

pea

ranc

e of

and

/or

incr

ease

in in

toxi

catio

nca

ses

amon

g fa

rm w

orke

rs o

r ru

ral p

opul

atio

ns;

Ap

pea

ranc

e of

and

/or

incr

ease

in c

ases

of

deat

h by

cont

amin

atio

n in

wild

flo

ra a

nd f

auna

, in

clud

ing

bene

ficia

l org

anis

ms

such

as

eart

h w

orm

s, t

erm

ites

and

pol

linat

ors;

Pest

icid

e re

sidu

es o

n cr

ops

affe

ctin

g p

ublic

hea

lthan

d p

rodu

ct m

arke

ting;

Old

pes

ticid

e st

ocks

tur

ning

into

tox

ic w

aste

.

Use

of

chem

ical

fer

tiliz

ers:

Det

erio

ratio

n in

gro

undw

ater

qua

lity

thro

ugh

infil

trat

ion

as a

res

ult

of in

app

rop

riate

ap

plic

atio

n;

Exce

ssiv

e gr

owth

of

alga

e an

d aq

uatic

pla

nts

inw

ater

bod

ies

due

to u

pst

ream

use

of

fert

ilize

rs,

lead

ing

to o

xyge

n de

ple

tion

and

even

tual

ly t

o fis

hki

ll.

MIT

IGA

TIO

N M

EASU

RES

Inte

grat

ed P

est

Man

agem

ent

(IPM

) to

red

uce

relia

nce

onp

estic

ides

.

IPM

ref

ers

to t

he c

aref

ul c

onsi

dera

tion

of a

ll av

aila

ble

pes

t co

ntro

lte

chni

que

s an

d su

bseq

uent

inte

grat

ion

of a

pp

rop

riate

mea

sure

sth

at d

isco

urag

e th

e de

velo

pm

ent

of p

est

pop

ulat

ions

and

kee

pp

estic

ides

and

oth

er in

terv

entio

ns t

o le

vels

tha

t ar

e ec

onom

ical

lyju

stifi

ed a

nd m

inim

ize

risks

to

hum

an h

ealth

and

the

envi

ronm

ent.

IPM

em

pha

size

s th

e gr

owth

of

a he

alth

y cr

op w

ithth

e le

ast

pos

sibl

e di

srup

tion

to a

gro-

ecos

yste

ms

and

enco

urag

esna

tura

l pes

t co

ntro

l mec

hani

sms.

Te

chni

que

s th

at c

an b

eap

plie

d un

der

an IP

M a

pp

roac

h in

clud

e e.

g.:

crop

rot

atio

n, c

rop

dive

rsifi

catio

n, s

elec

tion

of p

est

resi

stan

t cr

op v

arie

ties,

bio

logi

cal

cont

rol o

r ot

her

non-

chem

ical

tec

hniq

ues,

sel

ectiv

e p

estic

ide

use

as a

last

res

ort

cont

rol o

ptio

n.

For

mor

e de

tails

, se

e IP

M w

ebsi

te

http

://w

ww

.fao.

org/

glob

alip

mfa

cilit

y/ho

me.

htm

.

Whe

re p

estic

ide

use

rem

ains

nec

essa

ry:

subs

titut

ion

of

high

lyan

d m

oder

atel

y ha

zard

ous

and

broa

d-sp

ectr

um p

estic

ides

with

less

dan

gero

us a

nd m

ore

targ

et s

pec

ific

pro

duct

s, a

nd r

educ

ing

the

conc

entr

atio

n an

d nu

mbe

r of

ap

plic

atio

ns t

o a

min

imum

;

Know

ledg

e an

d en

forc

emen

t of

pes

ticid

e le

gisl

atio

n to

elim

inat

ep

rodu

cts

or a

pp

licat

ions

tha

t ar

e no

t p

erm

itted

an

d to

ens

ure

app

rop

riate

p

acka

ging

and

pro

per

labe

ling;

Prod

uct

know

ledg

e, u

se o

f ad

equa

te p

erso

nal p

rote

ctio

neq

uip

men

t du

ring

han

dlin

g an

d ap

plic

atio

n an

d co

rrec

t us

e of

app

rop

riate

ap

plic

atio

n eq

uip

men

t;

Prop

er s

tora

ge o

f p

estic

ides

.

Know

ledg

e ab

out

the

subs

tanc

es b

eing

use

d, c

orre

ct s

tora

ge a

ndap

plic

atio

n;

Redu

cing

fer

tiliz

er u

se o

r su

bstit

utin

g ch

emic

al f

ertil

izer

s w

ithm

anur

e or

oth

er o

rgan

ic f

ertil

izer

s.

MO

NIT

OR

ING

IN

DIC

AT

OR

S

Dir

ect:

Up

take

of

IPM

pra

ctic

es;

Inci

denc

e of

poi

soni

ng c

ases

and

pes

ticid

e re

late

dch

roni

c he

alth

pro

blem

s am

ong

farm

ers

and

wor

kers

usi

ng p

estic

ides

;

Inci

denc

e of

hea

lth p

robl

ems

due

to c

onsu

mp

tion

of p

rodu

ce o

r dr

inki

ng w

ater

con

tam

inat

ed w

ithp

estic

ide

resi

dues

.

Wat

er q

ualit

y in

drin

king

wat

er w

ells

an

d p

estic

ide

resi

dues

on

food

cro

ps;

Cha

nges

in p

opul

atio

ns o

f be

nefic

ial o

rgan

ism

s,w

ildlif

e, a

nd f

lora

.

Ind

irec

t:

Trai

ning

cou

rses

on

the

subj

ect;

Peop

le b

eing

tra

ined

on

the

subj

ect;

Req

uest

s fo

r te

chni

cal a

ssis

tanc

e on

the

sub

ject

;

Sale

s of

dan

gero

us p

estic

ides

in t

he a

rea;

Tota

l sal

es o

f p

estic

ides

in t

he a

rea.

Wat

er q

ualit

y in

drin

king

wat

er w

ells

(if

mea

sure

men

ts p

erfo

rmed

);

Visi

ble

chan

ges

in a

qua

tic p

lant

s in

dow

nstr

eam

wat

er b

odie

s;

Num

ber

of f

arm

ers

usin

g or

gani

c fe

rtili

zers

.


82

IMPA

CT

S

Use

of

mac

hin

ery:

Soil

com

pac

tion;

Eros

ion

and

soil

degr

adat

ion.

Bur

nin

g o

f p

lan

t re

sid

ues

in t

he

fiel

ds:

Salin

izat

ion

of s

oil;

Eros

ion.

Soci

al im

pac

ts f

rom

lan

d u

se c

han

ges

:

Com

pet

ition

bet

wee

n di

ffere

nt u

sers

for

land

and

wat

er r

esou

rces

; e.

g. c

rop

far

mer

s an

d liv

esto

ckbr

eede

rs o

ver

the

use

of w

ater

sou

rces

or

mos

tfe

rtile

land

s.

Imp

act

of

tech

no

log

y ch

ang

es o

n w

om

en :

The

imp

act

of n

ew a

gric

ultu

ral

crop

s/p

ract

ices

/mac

hine

ry o

n tr

aditi

onal

div

isio

nof

labo

r be

twee

n m

en a

nd w

omen

;El

evat

ed v

ulne

rabi

lity

of w

omen

to

pes

ticid

ep

oiso

ning

.

MIT

IGA

TIO

N M

EASU

RES

Con

serv

atio

n A

gric

ultu

re (

see

abov

e).

Stop

bur

ning

of

resi

dues

and

ado

pt

the

follo

win

g:

cM

ulch

ing

with

cro

p r

esid

ues;

cU

se o

f p

lant

res

idue

s to

cre

ate

hum

us;

cIP

M t

o co

ntro

l pes

ts a

nd d

isea

ses

(see

abo

ve);

cA

gric

ultu

ral e

xten

sion

and

ap

plie

d re

sear

ch o

n th

ep

reve

ntio

n of

soi

l sal

iniz

atio

n.

Part

icip

ator

y la

nd u

se p

lann

ing

at v

illag

e le

vel;

Cre

atio

n of

wat

er u

ser

asso

ciat

ions

and

tra

inin

g of

the

irm

anag

emen

t co

mm

ittee

s, e

tc.;

Cro

p/l

ives

tock

inte

grat

ion

(use

of

crop

res

idue

s as

fod

der,

use

ofm

anur

e as

fer

tiliz

er,

etc.

).

Part

icip

atio

n of

wom

en in

tec

hnol

ogy

deve

lop

men

t an

dad

apta

tion;

M

ains

trea

min

g ge

nder

con

side

ratio

ns in

tra

inin

g an

d at

tent

ion

toge

nder

bal

ance

in t

rain

ing;

Acc

ess

of w

omen

to

agric

ultu

ral e

xten

sion

ser

vice

s.IP

M –

see

abo

ve.

MO

NIT

OR

ING

IN

DIC

AT

OR

S

Form

atio

n of

bar

ren

soil;

Cha

nge

in t

he h

eigh

t of

roo

t p

edes

tals

;A

ccum

ulat

ion

of s

ilt/s

and

at t

he f

oot

of b

ushe

s,p

osts

and

fen

ces,

as

wel

l as

in d

owns

trea

m w

ater

bodi

es;

Dep

th o

f ril

ls/g

ullie

s;C

hang

es in

yie

lds;

Sedi

men

t lo

ads

in s

trea

ms

if da

ta a

vaila

ble

from

ane

arby

hyd

rolo

gica

l sta

tion.

Dea

ths

or d

ecre

ased

pro

duct

ivity

of

pla

nts

and

soil

orga

nism

s du

e to

sal

inity

;C

hang

e in

the

hei

ght

of r

oot

ped

esta

ls;

Acc

umul

atio

n of

silt

/san

d at

the

foo

t of

bus

hes,

pos

ts a

nd f

ence

s, a

s w

ell a

s in

dow

nstr

eam

wat

erbo

dies

;D

epth

of

rills

/gul

lies;

Cha

nges

in y

ield

s;Se

dim

ent

load

s in

str

eam

s if

data

ava

ilabl

e fr

om a

near

by h

ydro

logi

cal s

tatio

n.

Num

ber

of la

nd u

se p

lans

pre

par

ed;

Num

ber

of m

anag

emen

t co

mm

ittee

s in

op

erat

ion.

Num

ber

of w

omen

par

ticip

ants

to

trai

ning

cou

rses

;C

hang

es in

pes

ticid

e us

e by

wom

en a

ndoc

curr

ence

of

pes

ticid

e p

oiso

ning

sym

pto

ms.


83

IMPA

CT

S

Imp

acts

of

ove

rgra

zin

g:

Soil

com

pac

tion,

incr

ease

in s

urfa

ce r

un-o

ff an

der

osio

n du

e to

ove

rgra

zing

and

exc

essi

vetr

amp

ling;

Deg

rada

tion

of v

eget

atio

n an

d re

duct

ion

of m

ost

pal

atab

le s

pec

ies,

in p

artic

ular

aro

und

wat

erp

oint

s.

Low

erin

g of

wat

er t

able

due

to

incr

ease

dex

trac

tion

of g

roun

dwat

er t

hrou

gh c

attle

wel

ls;

Gro

undw

ater

con

tam

inat

ion

thro

ugh

catt

le w

ells

.

Def

ore

stat

ion

fo

r g

rass

lan

d e

stab

lish

men

t:

Biod

iver

sity

loss

;

Cha

nge

and

loss

of

natu

ral h

abita

ts.

MIT

IGA

TIO

N M

EASU

RES

Redu

ctio

n of

sto

ckin

g de

nsity

:

cSe

lect

ive

culli

ng o

f an

imal

s in

the

her

d;

cPa

stur

e ro

tatio

n, d

efer

red

graz

ing;

cFa

rm d

iver

sific

atio

n (e

.g.

agro

-tou

rism

).

Incr

easi

ng c

arry

ing

cap

acity

:

cPa

stur

e m

anag

emen

t an

d fe

rtili

zatio

n;

cSu

pp

lem

enta

ry f

orag

e p

rodu

ctio

n;

cSu

pp

lem

enta

ry f

eedi

ng;

cIn

clus

ion

of f

orag

e sh

rubs

and

tre

es.

Eros

ion

cont

rol:

cC

over

cro

ps

& d

irect

see

ding

;

cC

rop

res

idue

man

agem

ent

& t

reat

men

t;

cAv

oid

graz

ing

frag

ile a

reas

.

Elab

orat

ion

of d

roug

ht s

urvi

val s

trat

egie

s:

cLi

vest

ock

mar

kers

;

cTe

mp

oral

sla

ught

er h

ouse

s.

For

mor

e de

tails

, se

e Li

vest

ock,

Env

ironm

ent

and

Dev

elop

men

tw

ebsi

te h

ttp

://w

ww

.fao.

org/

lead

/.

Stra

tegi

c p

lace

men

t of

wat

er s

ourc

es;

Regu

latio

n of

wat

er u

se:

cont

rol o

f w

ater

poi

nt u

se,

limita

tion

ofw

ell c

apac

ity,

clos

ure

of p

erm

anen

t w

ater

sou

rces

dur

ing

the

rain

seas

on,

cov

erin

g of

wel

ls,

app

rop

riate

wat

erin

g st

ruct

ures

, w

ell

man

agem

ent

com

mitt

ees,

etc

.

Silv

opas

tora

l sys

tem

s fo

r co

nser

vatio

n of

bio

dive

rsity

and

car

bon

seq

uest

ratio

n;

Farm

div

ersi

ficat

ion.

MO

NIT

OR

ING

IN

DIC

AT

OR

S

Are

a ch

ange

s of

deg

rade

d p

astu

res;

Size

of

"des

ertif

icat

ion

circ

les"

aro

und

wat

er p

oint

s;

Cha

nge

in t

he h

eigh

t of

roo

t p

edes

tals

;

Acc

umul

atio

n of

silt

/san

d at

the

foo

t of

bus

hes,

pos

ts a

nd f

ence

s;

Dep

th o

f ril

ls/g

ullie

s;

Sedi

men

t lo

ads

in s

trea

ms

if da

ta a

vaila

ble

from

ane

arby

hyd

rolo

gica

l sta

tion;

Ani

mal

pop

ulat

ion

& d

ensi

ty;

Cha

nges

in w

eed

inci

denc

e.

Cha

nges

in w

ater

tab

le le

vels

in w

ells

;

Wat

er q

ualit

y in

drin

king

wat

er w

ells

(if

mea

sure

men

ts p

erfo

rmed

).

Are

a ch

ange

s in

for

este

d ar

eas

and

gras

slan

ds.

TAB

LE 2

- L

ives

tock

hus

ban

dry

: Pra

ctic

es a

ssoc

iate

d w

ith

en

viro

nm

enta

l ris

k.

Poss

ible

ad

vers

e im

pac

ts, m

itig

atio

n m

easu

res

and

ind

icat

ors

for

mon

itor

ing

.


84

IMPA

CT

S

Con

tam

inat

ion

of a

nim

al p

rodu

cts

dest

ined

for

hum

an c

onsu

mp

tion.

Into

xica

tion

of w

orke

rs h

andl

ing

tick

kille

rs a

nd/o

rp

erso

ns u

sing

em

pty

bot

tles;

Wat

er c

onta

min

atio

n fr

om in

adeq

uate

dis

pos

al o

fch

emic

als;

Tick

res

ista

nce

to a

caric

ides

.

An

imal

bre

edin

g:

Redu

ctio

n of

agr

o-bi

odiv

ersi

ty d

ue t

o br

eed

choi

ces;

New

bre

eds

less

ada

pte

d to

loca

l con

ditio

ns.

Imp

act

on

wild

life:

Incr

ease

d ki

lling

of

wild

life

cons

ider

ed a

s p

ests

or

pre

dato

rs;

Com

pet

ition

for

foo

d an

d w

ater

res

ourc

es;

Incr

ease

in d

isea

ses;

Loss

of

habi

tat

or m

igra

tory

rou

tes.

Pollu

tio

n f

rom

an

imal

was

te:

Con

tam

inat

ion

of s

urfa

ce a

nd g

roun

d w

ater

s;O

dor

pro

blem

s &

gre

enho

use

gase

s.

Nut

rient

enr

ichm

ent

of s

oils

.

Soci

al im

pac

ts:

Soci

al a

nd c

ultu

ral c

hang

es d

ue t

o ch

ange

fro

mno

mad

ism

/tra

nshu

man

ce t

o st

able

live

stoc

kp

rodu

ctio

n.

MIT

IGA

TIO

N M

EASU

RES

Prep

arat

ion

of b

alan

ced

feed

s on

the

far

m.

Cho

ice

of t

ick

kille

r ch

emic

als,

met

hods

and

tim

ing

that

min

imiz

een

viro

nmen

tal i

mp

acts

(se

e al

so T

able

1,

on t

he u

se o

fp

estic

ides

);Tr

aini

ng a

nd a

war

enes

s-ra

isin

g of

live

stoc

k ow

ners

and

her

ders

on a

caric

ide

& in

sect

icid

e us

e an

d ha

ndlin

g.

Prom

otio

n of

loca

l bre

eds;

M

aint

aini

ng v

aria

bilit

y w

ithin

pop

ulat

ions

;U

ncon

vent

iona

l liv

esto

ck p

rodu

ctio

n (e

.g.

alp

aca,

llam

a).

Cre

atio

n of

pro

tect

ed a

reas

;Ra

nge

man

agem

ent

stra

tegi

es t

hat

min

imiz

e im

pac

ts o

n w

ildlif

e;A

gro-

tour

ism

;A

pp

rop

riate

met

hods

of

pes

t an

d p

reda

tor

cont

rol (

e.g.

tra

ps

inst

ead

of p

oiso

n, s

ee a

lso

Tabl

e 1

on p

estic

ides

).

Prop

er m

anur

e st

orag

e an

d m

anag

emen

t:c

Redu

ctio

n in

wat

er u

se;

cSe

par

atio

n of

sol

ids;

cPr

oper

sto

rage

unt

il ap

plic

atio

n tim

e;c

Ana

erob

ic f

erm

enta

tion

& b

ioga

s p

rodu

ctio

n.

Man

ure

app

licat

ion

to s

oils

at

reco

mm

ende

d fe

rtili

zer

rate

s;U

se o

f hi

gh y

ield

ing

crop

s.

Acc

ess

of m

obile

pas

tora

lists

to

vete

rinar

y an

d ot

her

serv

ices

;C

onsu

ltatio

n of

all

affe

cted

com

mun

ities

; Re

cogn

ition

of

trad

ition

al la

nd u

se r

ight

s an

d p

ract

ices

.

MO

NIT

OR

ING

IN

DIC

AT

OR

S

Che

mic

al a

naly

sis

of a

nim

al p

rodu

cts

dest

ined

for

hum

an c

onsu

mp

tion.

For

mon

itorin

g th

e us

e of

tic

k ki

llers

, se

e Ta

ble

1;

Wat

er q

ualit

y in

wat

er b

odie

s (if

mea

sure

men

tsp

erfo

rmed

).

Prop

ortio

n of

loca

l bre

eds

in c

attle

pop

ulat

ion;

Num

ber

of b

reed

s gr

own

in t

he a

rea.

Cas

es o

f w

ildlif

e ki

lling

and

poa

chin

g;N

umbe

r of

pre

dato

r p

oiso

ning

cas

es;

Size

of

Prot

ecte

d A

reas

.

Wat

er q

ualit

y in

str

eam

s;Pr

opor

tion

of f

arm

ers

with

man

ure

stor

age

faci

litie

s;Vo

lum

e of

bio

gas

pro

duce

d.

Nut

rient

con

cent

ratio

n in

soi

ls (

N,

P, K

);C

hang

es in

cro

p y

ield

s.

Use

of

ph

arm

aceu

tica

ls a

nd

hor

mon

es

(in

com

mer

cial

fee

d c

once

ntr

ates

) an

d a

cari

cid

es:


85

IMPA

CT

S

Co

nst

ruct

ion

of

irri

gat

ion

infr

astr

uctu

re:

Redu

ctio

n of

min

imum

flo

w in

riv

ers,

affe

ctin

gaq

uatic

flo

ra a

nd f

auna

and

red

ucin

g w

ater

avai

labi

lity

dow

nstr

eam

;

Cha

nges

in t

he n

atur

al c

ours

e of

wat

erw

ays;

Soil-

and

tre

e-cu

ttin

g al

ong

ripar

ian

area

s w

here

wat

er w

ill b

e dr

awn

(up

take

for

irrig

atio

n),

resu

lting

in e

rosi

on a

long

riv

erba

nks;

Vert

ical

dra

inag

e as

soci

ated

with

hig

hco

ncen

trat

ion

of w

ells

for

pum

pin

g gr

ound

wat

eran

d th

e co

nseq

uent

low

erin

g of

wat

er t

able

.

Op

erat

ion

of

irri

gat

ion

sys

tem

:

Redu

ctio

n of

min

imum

flo

w in

riv

ers,

end

ange

ring

aqua

tic f

lora

and

fau

na a

nd r

educ

ing

wat

erav

aila

bilit

y do

wns

trea

m;

Wat

er lo

ggin

g (r

ise

of w

ater

tab

le)

asso

ciat

ed w

ithlo

w ir

rigat

ion

effic

ienc

y;

Ove

rexp

loita

tion

of g

roun

dwat

er t

hrou

gh w

ells

and

cons

eque

nt lo

wer

ing

of w

ater

tab

le;

Salin

izat

ion

or a

lkal

izat

ion

of s

oil;

Eros

ion;

Deg

rada

tion

of w

ater

qua

lity

in r

eser

voirs

or

rece

ivin

g w

ater

bod

ies

(alg

al b

loom

s, a

qua

ticw

eeds

, et

c.);

Incr

ease

in w

ater

born

e di

seas

es;

Dis

ease

tra

nsm

issi

on t

hrou

gh c

onta

min

ated

irrig

atio

n w

ater

;

MIT

IGA

TIO

N M

EASU

RES

Prop

er s

iting

and

par

ticip

ator

y p

lann

ing,

incl

udin

g st

udie

s on

wat

er a

vaila

bilit

y;

Com

mun

ity p

artic

ipat

ion

in d

esig

n an

d co

nstr

uctio

n(w

alkt

hrou

gh w

ith f

arm

ers

and

Part

icip

ator

y Ra

pid

Ap

pra

isal

(PRA

)) a

nd e

stab

lishm

ent

of w

ater

use

rs a

ssoc

iatio

n be

fore

cons

truc

tion;

Des

ign

of w

orks

so

as t

o m

inim

ize

the

need

to

chan

ge n

atur

alw

ater

cour

ses;

Soil

cons

erva

tion;

Con

trol

on

borin

g of

new

wel

ls;

Redu

ctio

n in

the

den

sity

of

wel

ls o

r lim

itatio

n of

pum

p c

apac

ity(it

sho

uld

be p

oint

ed o

ut t

hat

in t

he c

ase

of w

ater

logg

ing,

vert

ical

dra

inag

e m

ight

be

deem

ed n

eces

sary

to

low

er t

hegr

ound

wat

er le

vel).

Con

trol

of

irrig

atio

n w

ater

vol

umes

, re

spec

ting

min

imum

flo

ws

and

aqui

fer

cap

acity

;

Op

erat

ion

and

mai

nten

ance

pla

ns f

or ir

rigat

ion

infr

astr

uctu

re;

Agr

icul

tura

l ext

ensi

on,

trai

ning

and

ap

plie

d re

sear

ch o

n so

ilsa

liniz

atio

n an

d re

late

d is

sues

(w

ater

logg

ing,

alk

aliz

atio

n, e

tc);

Mic

ro-w

ater

shed

man

agem

ent;

Qua

lity

test

s on

irrig

atio

n w

ater

, in

clud

ing

mon

itorin

g of

pes

ticid

e co

ntam

inat

ion;

Part

icul

arly

for

larg

er s

chem

es:

good

irrig

atio

n m

anag

emen

t, i.

e.,

a m

ore

ratio

nal a

nd e

ffici

ent

use

of ir

rigat

ion

wat

er,

by:

a) c

lose

lym

atch

ing

irrig

atio

n de

man

ds a

nd s

upp

ly t

o re

duce

see

pag

e an

din

crea

se ir

rigat

ion

effic

ienc

y; b

) p

rovi

ding

dra

inag

e if

wat

er is

of

good

qua

lity,

and

c)

mai

ntai

ning

can

als

to p

reve

nt s

eep

age,

and

redu

ce in

effic

ienc

ies

resu

lting

fro

m s

iltat

ion

and

wee

d;

MO

NIT

OR

ING

IN

DIC

AT

OR

S

Cha

nges

in t

he le

vel o

f la

ke/r

iver

flo

w;

Cha

nges

in f

ish

catc

hes

from

the

affe

cted

wat

erbo

dy;

Are

a of

exp

osed

riv

erba

nks;

Fall

of w

ater

tab

le in

wel

ls;

Cha

nge

in t

he h

eigh

t of

roo

t p

edes

tals

;

Acc

umul

atio

n of

silt

/san

d at

the

foo

t of

bus

hes,

pos

ts a

nd f

ence

s, a

s w

ell a

s in

dow

nstr

eam

wat

erbo

dies

;

Dep

th o

f ril

ls/g

ullie

s;

Sedi

men

t lo

ads

in s

trea

ms

if da

ta a

vaila

ble

from

ane

arby

hyd

rolo

gica

l sta

tion.

Cha

nges

in t

he le

vel o

f la

ke/r

iver

flo

w;

Cha

nges

in f

ish

catc

hes

from

the

affe

cted

wat

erbo

dy;

Cha

nges

in w

ater

tab

le in

wel

ls;

Volu

me

of w

ater

use

d p

er h

ecta

re;

Visi

ble

chan

ges

in t

he w

ater

qua

lity

in r

ecei

ving

wat

er b

odie

s;

Wat

er q

ualit

y in

drin

king

wat

er w

ells

(if

mea

sure

men

ts p

erfo

rmed

);

Cha

nge

in t

he a

rea

of b

arre

n la

nds;

Cha

nge

in t

he h

eigh

t of

roo

t p

edes

tals

;

Acc

umul

atio

n of

silt

/san

d at

the

foo

t of

bus

hes,

pos

ts a

nd f

ence

s;

Dep

th o

f ril

ls/g

ullie

s;

TAB

LE 3

- S

mal

l-sca

le ir

rig

atio

n in

fras

truc

ture

: Pra

ctic

es a

ssoc

iate

d w

ith

en

viro

nm

enta

l ris

k. P

ossi

ble

ad

vers

e im

pac

ts, m

itig

atio

n m

easu

res

and

ind

icat

ors

for

mon

itor

ing

.

Smal

l-sca

le ir

rigat

ion

may

incl

ude

one

of t

he fo

llow

ing

cate

gorie

s: r

un-o

f-riv

er s

chem

es, s

mal

l res

ervo

irs o

r gr

ound

wat

er s

chem

es (

deep

and

sha

llow

wel

ls).


86

IMPA

CT

S

Con

flict

s ov

er t

he u

se o

f w

ater

and

irrig

ated

land

;

Uns

usta

inab

le c

rop

pro

duct

ion

and

exce

ssiv

e us

eof

pes

ticid

es,

resu

lting

in w

ater

con

tam

inat

ion

and

dim

inis

hing

ret

urns

on

inve

stm

ent

in t

he ir

rigat

ion

sche

me.

MIT

IGA

TIO

N M

EASU

RES

Trai

ning

in s

anita

tion

and

hygi

ene;

Prot

ectio

n of

can

als

from

live

stoc

k;

Con

sulta

tion

of a

ll af

fect

ed c

omm

uniti

es,

esta

blis

hmen

t of

man

agem

ent

com

mitt

ees,

etc

.

IPM

– s

ee T

able

1.

MO

NIT

OR

ING

IN

DIC

AT

OR

S

Dea

ths

or d

ecre

ased

pro

duct

ivity

of

pla

nts

and

soil

orga

nism

s du

e to

sal

inity

;

Alk

alin

ity:

incr

ease

in s

oil p

H;

Num

ber

of o

per

atio

n an

d m

aint

enan

ce p

lans

;

Num

ber

of m

icro

-wat

ersh

ed m

anag

emen

t p

lans

;

Cha

nges

in w

ater

-rel

ated

dis

ease

leve

ls;

Num

ber

of s

erio

us la

nd u

se c

onfli

cts;

Pest

icid

e re

sidu

es in

wat

er;

Pest

man

agem

ent

pra

ctic

es a

nd u

se le

vels

of

pes

ticid

es.

Op

erat

ion

of

irri

gat

ion

sys

tem

:


87

IMPA

CT

S

Ag

ro-p

roce

ssin

g:

Con

tam

inat

ion

of s

urfa

ce a

nd

grou

nd w

ater

fro

mw

aste

wat

er;

Ove

r-ex

trac

tion

of s

urfa

ce a

nd g

roun

d w

ater

s;

Air

pol

lutio

n;

Noi

se a

nd o

dor

pol

lutio

n.

Con

tam

inat

ion

of p

rodu

cts

with

pes

ticid

es d

ue t

oim

pro

per

pos

t-ha

rves

t p

est

cont

rol.

Con

tam

inat

ion

of t

he e

nviro

nmen

t du

e to

accu

mul

atio

n of

sol

id w

aste

, in

trod

uctio

n of

haza

rdou

s w

aste

, an

d/or

dec

omp

ositi

on o

f or

gani

cm

ater

ials

.

Def

icie

nt

hyg

ien

ic p

ract

ices

:

Con

tam

inat

ion

of p

roce

ssed

foo

dstu

ffs.

MIT

IGA

TIO

N M

EASU

RES

Loca

tion

of a

gro-

indu

strie

s in

zon

es w

here

wat

er s

upp

ly c

an b

een

sure

d an

d w

hich

hav

e se

wag

e an

d w

aste

wat

er t

reat

men

tsy

stem

s;

Min

imiz

atio

n of

wat

er a

nd c

hem

ical

use

;

Prom

otio

n of

tra

nsfo

rmat

ion

pro

cess

es b

ased

on

bio-

degr

adab

lesu

bsta

nces

;

Use

of

"cle

an"

pro

duct

ion

tech

nolo

gies

;

Trea

tmen

t of

was

tew

ater

, an

d at

mos

phe

ric e

mis

sion

s;

Aco

ustic

pro

tect

ion

met

hods

in p

lant

s th

at c

reat

e ex

cess

ive

nois

e;

Non

-che

mic

al p

ost-

harv

est

pes

t co

ntro

l.

Use

of

orga

nic

was

te a

s fe

rtili

zer

on a

gric

ultu

ral/

pas

ture

soi

ls;

Redu

ctio

n of

sol

id w

aste

thr

ough

the

use

of

clea

ner

tech

nolo

gy,

recy

clin

g re

sidu

es,

etc.

;

Trea

tmen

t an

d di

spos

al o

f so

lid w

aste

acc

ordi

ng t

o th

ere

gula

tions

on

solid

was

te m

anag

emen

t;

Prop

er t

reat

men

t an

d di

spos

al o

f ha

zard

ous

was

te (

disp

osal

inre

gula

ted

land

fills

).

Stric

t hy

gien

ic s

tand

ards

;

Prod

uct

qua

lity

cont

rol;

Trai

ning

of

wor

kers

.

MO

NIT

OR

ING

IN

DIC

AT

OR

S

Volu

me

of w

ater

use

;

Cha

nges

in t

he le

vel o

f la

ke/r

iver

whe

re t

he w

ater

is d

raw

n;

Cha

nges

in w

ater

tab

le le

vel i

n w

ells

;

Visi

ble

chan

ges

in t

he w

ater

qua

lity

in r

ecei

ving

wat

er b

odie

s;

Cha

nges

in f

ish

catc

hes

from

affe

cted

wat

er b

odie

s;

Wat

er q

ualit

y in

drin

king

wat

er w

ells

(if

mea

sure

men

ts p

erfo

rmed

).

For

bigg

er p

lant

s (in

add

ition

to

the

abov

e):

Qua

ntity

and

qua

lity

of w

aste

wat

er d

isch

arge

s;

Qua

lity

of a

ir em

issi

ons.

Com

pla

ints

on

nois

e an

d od

or f

rom

loca

lp

opul

atio

ns;

Che

mic

al a

naly

sis

of p

rodu

cts

dest

ined

for

hum

anco

nsum

ptio

n.

Volu

me

of s

olid

was

te (

not

recy

cled

);

Volu

me

of o

rgan

ic w

aste

(no

t re

used

);

Volu

me

of h

azar

dous

was

te;

Wat

er q

ualit

y in

drin

king

wat

er w

ells

(if

mea

sure

men

ts p

erfo

rmed

);

Fina

l dis

pos

al o

f w

aste

(re

gula

ted

or u

nreg

ulat

edla

ndfil

ls).

Che

mic

al a

nd b

acte

riolo

gica

l ana

lysi

s on

foo

dstu

ffs.

TAB

LE 4

- A

gro

-ind

ustr

y: P

ract

ices

ass

ocia

ted

wit

h e

nvi

ron

men

tal r

isk.

Pos

sib

le a

dve

rse

imp

acts

, mit

igat

ion

mea

sure

s an

d in

dic

ator

s fo

r m

onit

orin

g.


88

IMPA

CT

S

Def

ores

tatio

n in

for

ests

nea

r ag

ro-in

dust

ry;

Ince

ntiv

es f

or d

efor

esta

tion

for

sale

to

agro

-in

dust

ry;

Air

pol

lutio

n.

Ch

ang

es in

live

liho

od

s:

Dec

reas

ed d

eman

d fo

r ce

rtai

n ag

ricul

tura

lp

rodu

cts

or f

or m

icro

-sca

le a

gro-

pro

cess

ing.

MIT

IGA

TIO

N M

EASU

RES

Use

of

alte

rnat

ive

ener

gy s

ourc

es;

Use

of

ener

gy e

ffici

ent

equi

pm

ent;

Use

of

agro

-res

idue

s as

fue

l;

Woo

dfue

l pla

ntat

ions

(bu

t se

e Ta

ble

5).

Con

sulta

tion

and

par

ticip

atio

n of

the

who

le c

omm

unity

inp

roje

ct p

rep

arat

ion.

MO

NIT

OR

ING

IN

DIC

AT

OR

S

Volu

me

of f

uelw

ood

use

per

pla

nt;

Size

of

degr

aded

for

est

arou

nd t

he p

lant

.

Co

nsu

mp

tio

n o

f fu

elw

oo

d in

ag

ro-i

nd

ustr

y:


89

IMPA

CT

S

Esta

blis

hm

ent

of

fore

st p

lan

tati

on

s:

Redu

ctio

n or

loss

of

bio-

dive

rsity

.

Soil

eros

ion

durin

g la

nd p

rep

arat

ion.

Silta

tion

of s

trea

ms.

Soil

com

pac

tion.

Redu

ctio

n in

str

eam

flo

w a

nd lo

wer

ing

of t

hew

ater

tab

le.

Soil

cont

amin

atio

n du

e to

use

of

herb

icid

es a

ndin

sect

icid

es.

MIT

IGA

TIO

N M

EASU

RES

Avoi

d cl

earin

g in

dige

nous

for

est;

Giv

e co

mp

lete

pro

tect

ion

to c

ritic

al h

abita

ts;

If ad

equa

te s

amp

les

of t

he o

rigin

al v

eget

atio

n do

not

exi

stou

tsid

e th

e p

lant

atio

n, c

reat

e p

rote

ctio

n ar

eas

(set

-asi

des)

of

rep

rese

ntat

ive

sam

ple

s (1

0%)

insi

de t

he p

lant

atio

n.

Plan

t up

as

soon

as

pos

sibl

e af

ter

land

cle

arin

g.

Do

not

clea

r st

eep

, un

stab

le s

lop

es o

r hi

ghly

ero

sive

soi

ls,

and

limit

site

pre

par

atio

n to

the

dry

sea

son.

If p

loug

hing

is n

eede

d, it

sho

uld

be d

one

alon

g th

e co

ntou

rus

ing

trac

tors

with

flo

tatio

n tir

es.

Con

serv

e al

l rip

aria

n fo

rest

s (a

reas

loca

ted

on t

he b

anks

of

river

s,cr

eeks

and

sp

rings

); p

lant

with

indi

geno

us s

pec

ies;

Con

serv

e al

l wet

land

s an

d m

arsh

es.

Ensu

re t

hat

only

the

cor

rect

dos

age

of h

erbi

cide

s an

d in

sect

icid

esar

e us

ed,

that

wor

kers

are

pro

per

ly t

rain

ed in

the

ir us

e, a

ndcl

osel

y su

per

vise

fie

ld o

per

atio

ns.

MO

NIT

OR

ING

IN

DIC

AT

OR

S

Fiel

d in

spec

tion/

map

s

Cha

nges

in p

opul

atio

ns o

f In

dica

tor

spec

ies

Prot

ectio

n A

reas

iden

tifie

d in

man

agem

ent

pla

n.

Incr

ease

in a

reas

sub

ject

to

eros

ion

and

dep

th o

fril

ls/g

ullie

s.

Sedi

men

t lo

ads

in s

trea

ms.

Pres

ence

of

hard

pan

(i.e

. so

il/su

bsoi

l con

ditio

n in

whi

ch t

he s

oil g

rain

s be

com

e ce

men

ted

toge

ther

by s

uch

bond

ing

agen

ts a

s iro

n ox

ide

and

calc

ium

carb

onat

e, f

orm

ing

a ha

rd,

imp

ervi

ous

mas

s).

Cha

nges

in d

ry s

easo

n w

ater

leve

ls a

nd w

ater

tab

lele

vel;

Man

agem

ent

pla

n an

d fie

ld in

spec

tion.

Leve

l of

cont

amin

ants

in g

roun

d w

ater

and

stre

ams.

TAB

LE 5

- S

mal

l-sca

le f

ores

try

oper

atio

ns:

Pra

ctic

es a

ssoc

iate

d w

ith

en

viro

nm

enta

l ris

k. P

ossi

ble

ad

vers

e im

pac

ts, m

itig

atio

n m

easu

res

and

ind

icat

ors

for

mon

itor

ing

.

All t

ree

plan

tatio

ns o

f one

hec

tare

and

abo

ve, a

nd a

ll fo

rest

har

vest

ing

oper

atio

ns s

houl

d be

car

ried

out

in a

ccor

danc

e w

ith a

n ap

prov

ed s

impl

e m

anag

emen

t pl

an.

Each

man

agem

ent

pla

nsh

ould

incl

ude

an o

utlin

e en

viro

nmen

tal a

sses

smen

t, w

hich

sho

uld

pres

crib

e m

any

of t

he m

itiga

tion

mea

sure

s lis

ted

belo

w. W

here

pos

sible

,sm

all-s

cale

ope

rato

rs s

houl

d be

enc

oura

ged

to fo

rm c

oope

rativ

es o

r pr

oduc

er a

ssoc

iatio

ns/o

rgan

izat

ions

so

as t

o re

duce

man

agem

ent

cost

s. It

wou

ld a

lso fa

cilit

ate

the

intr

oduc

tion

of fo

rest

cer

tific

atio

n, a

pro

cess

tha

t ca

n co

nfirm

tha

t th

e fo

rest

pro

duct

s ar

e be

ing

harv

este

d fr

om s

usta

inab

le s

ourc

es. T

his

is es

peci

ally

impo

rtan

t fo

rpr

oduc

ts d

estin

ed fo

r ex

port

.


90

IMPA

CT

S

Incr

ease

d in

cide

nce

of p

ests

and

dis

ease

s.

Wild

fire

s.

Use

of

exo

tic

spec

ies

in p

lan

tati

on

s:

Cha

nges

in s

oil s

truc

ture

and

loss

of

fert

ility

.

Redu

ced

stre

am f

low

and

low

erin

g of

wat

er t

able

.

Incr

ease

d ris

k of

pes

ts a

nd d

isea

ses.

Redu

ctio

n or

loss

of

biod

iver

sity

, es

pec

ially

inna

tura

l for

est

area

s.

Frag

men

tatio

n of

hab

itats

and

dis

rup

tion

ofbi

olog

ical

cor

ridor

s.

Fore

st/e

cosy

stem

deg

rada

tion.

Unc

ontr

olle

d hu

man

set

tlem

ent

and

defo

rest

atio

n.

MIT

IGA

TIO

N M

EASU

RES

Use

mix

ed s

pec

ies

pla

ntat

ions

;

Imp

lem

ent

a si

mp

le,

ocul

ar s

yste

m o

f p

est

and

dise

ase

mon

itorin

g.

Cle

ar f

irebr

eak

in t

he a

rea

if bu

rnin

g is

to

be u

sed

for

clea

ring

and

keep

ade

qua

te la

bor

avai

labl

e to

con

trol

fire

s.

If p

ossi

ble,

use

exo

tic s

pec

ies

in a

grof

ores

try/

silv

opas

tora

l sys

tem

son

ly,

and

use

only

org

anic

fer

tiliz

ers.

Con

serv

e rip

aria

n fo

rest

and

wet

land

s; u

se w

ider

tre

e sp

acin

g.

Imp

lem

ent

sim

ple

ocu

lar

syst

ems

of p

est

and

dise

ase

mon

itorin

g.

Prod

ucts

fro

m n

atur

al f

ores

t m

ust

be h

arve

sted

in a

ccor

danc

ew

ith a

n ap

pro

ved

harv

estin

g p

lan

whi

ch m

ust

be b

ased

on

grow

th d

ata

and

inve

ntor

ies;

logg

ing

mus

t in

clud

e p

reha

rves

ting

clim

ber

cutt

ing,

min

imum

dia

met

ers

limits

, an

adeq

uate

fel

ling

cycl

e, a

nnua

l cou

pes

, di

rect

iona

l fel

ling,

wel

lp

lann

ed s

kid

trai

ls a

nd p

rote

ctio

n ar

eas.

Iden

tify

criti

cal h

abita

ts a

nd p

rohi

bit

inte

rven

tion,

avo

id s

ensi

tive

area

s an

d p

rovi

de p

assa

gew

ays

to li

nk c

orrid

ors.

Har

vest

in a

ccor

danc

e w

ith p

resc

riptio

ns o

f m

anag

emen

t p

lan,

and

have

the

op

erat

ion

cert

ified

;

In p

lant

atio

ns,

avoi

d ar

eas

of n

atur

al v

eget

atio

n.

Ensu

re t

he e

xist

ence

of

enfo

rcea

ble

pro

per

ty r

ight

s an

d th

ein

stitu

tiona

l cap

acity

/com

mitm

ent

to c

ontr

ol s

ettle

men

t.

MO

NIT

OR

ING

IN

DIC

AT

OR

S

Incr

ease

or

decr

ease

in t

he in

cide

nce

of p

ests

,da

mag

e to

tre

es.

Fire

rec

ords

.

Nut

rient

leve

ls in

soi

ls o

rgan

ic c

onte

nt a

nd p

H o

fso

il.

Cha

nges

in d

ry s

easo

n w

ater

leve

ls in

wel

ls a

nd d

ryse

ason

flo

w in

str

eam

s.

Incr

ease

or

decr

ease

in p

est

and

pla

nt d

isea

sele

vels

.

Ap

pro

ved

man

agem

ent

pla

n an

d, if

pra

ctic

al,

cert

ifica

tion

rece

ived

.

Inve

ntor

ies

to m

onito

r p

opul

atio

ns o

f in

dica

tor

spec

ies.

Man

agem

ent

pla

n an

d fie

ld r

ecor

ds.

Cas

es o

f ne

w il

lega

l hum

an s

ettle

men

ts;

Exis

tenc

e of

legi

slat

ion/

inst

itutio

ns r

egul

atin

ghu

man

set

tlem

ents

.

Esta

blis

hm

ent

of

fore

st p

lan

tati

on

s:

Fore

st h

arve

stin

g,

incl

udin

g w

oo

d a

nd

n

on

-wo

od

pro

duc

ts:


91

IMPA

CT

S

Con

flict

s w

ith t

radi

tiona

l use

rs.

Soil

com

pac

tion

and

eros

ion.

Silta

tion

of s

trea

ms.

Illeg

al h

untin

g an

d ac

cide

ntal

fire

s.

Smal

l sca

le p

roce

ssin

g p

lan

ts:

Air

pol

lutio

n –

carb

on d

ioxi

de,

carb

on m

onox

ide

smok

e an

d du

st.

Soil

and

wat

er p

ollu

tion

– ex

trac

tives

of

bark

,w

ood

pre

serv

ativ

es,

addi

tives

, sa

wdu

st,

char

coal

,

acid

s, t

ars,

veh

icle

fue

l oils

and

lubr

ican

ts.

Noi

se.

Ind

igen

ous

fo

rest

-dep

end

ent

peo

ple

:

Cha

nges

in li

velih

oods

and

cul

tura

l ide

ntity

;

Spre

ad o

f in

fect

ious

dis

ease

s.

MIT

IGA

TIO

N M

EASU

RES

Def

ine

and

ensh

rine

trad

ition

al u

ser

right

s in

man

agem

ent

pla

n.

Use

cab

le w

ays

inst

ead

of r

oads

;

Whe

re r

oads

are

the

onl

y al

tern

ativ

e, t

hey

mus

t be

wel

l pla

nned

and

cons

truc

ted

in a

ccor

danc

e w

ith t

echn

ical

sp

ecifi

catio

nsap

pro

pria

te t

o lo

cal c

ondi

tions

;

Min

imiz

e ca

nop

y di

stur

banc

e an

d da

mag

e to

the

und

erst

orey

thro

ugh

bett

er r

oad

alig

nmen

t;

Use

ani

mal

ext

ract

ion.

Con

serv

e rip

aria

n fo

rest

and

min

imiz

e ca

nop

y an

d un

ders

tore

ydi

stur

banc

e.

Imp

lem

ent

envi

ronm

enta

l edu

catio

n p

rogr

ams

for

fore

st w

orke

rsan

d fo

rest

com

mun

ities

in a

nd a

roun

d fo

rest

;

Ensu

re t

hat

adeq

uate

lega

l pro

tect

ion

exis

ts t

o co

ntro

l hun

ting.

Legi

slat

ion,

em

issi

on c

ontr

ol,

cycl

one

dust

rem

oval

, us

e of

hydr

opow

er.

Legi

slat

ion,

sp

ill p

onds

, oi

l tra

ps,

rec

over

y of

was

te w

ood.

Legi

slat

ion,

car

eful

site

pla

nnin

g, in

sula

tion,

noi

se a

bate

men

t.

Car

eful

site

sel

ectio

n av

oidi

ng in

dige

nous

are

as,

par

ticip

atio

n of

indi

geno

us p

eop

le in

pro

ject

pla

nnin

g, in

dige

nous

peo

ple

s’ p

lan.

MO

NIT

OR

ING

IN

DIC

AT

OR

S

Man

agem

ent

pla

n.

Man

agem

ent

pla

n an

d fie

ld o

bser

vatio

ns;

Eros

ion

indi

cato

rs (

see

abov

e ta

bles

).

Sedi

men

t lo

ad in

str

eam

s.

Bush

mea

t co

nsum

ptio

n su

rvey

s, s

pec

ies

inve

ntor

ies

and

fore

st f

ire r

ecor

ds.

Air

qua

lity

mon

itorin

g.

Soil

and

wat

er q

ualit

y m

onito

ring.

Noi

se le

vel m

onito

ring;

Com

pla

ints

fro

m lo

cal p

opul

atio

ns.

Con

sulta

tions

and

wor

ksho

ps

with

loca

l peo

ple

;

Med

ical

rec

ords

.

Fore

st h

arve

stin

g,

incl

udin

g w

oo

d a

nd

n

on

-wo

od

pro

duc

ts:


92

IMPA

CT

S

Fire

s in

for

est

and

gras

slan

ds.

Co

nst

ruct

ion

of

smal

l-sc

ale

infr

astr

uctu

re

(tra

ils,

sig

nb

oar

ds,

cam

psi

tes

etc.

):

Dis

turb

ance

of

wild

life;

Eros

ion

asso

ciat

ed t

o tr

ail c

onst

ruct

ion;

Incr

ease

d hu

man

pre

senc

e in

isol

ated

are

as t

hat

may

lead

to

illeg

al lo

ggin

g or

land

con

vers

ion.

Un

sust

ain

able

co

nsu

mp

tio

n o

f ve

get

atio

n,

wild

life

and

oth

er n

atur

al r

eso

urce

s:

Loss

of

bio-

dive

rsity

;Lo

ss o

f na

tura

l res

ourc

es.

Solid

was

te:

Acc

umul

atio

n of

gar

bage

and

rub

bish

at

tour

ist

site

s.

Soci

al a

nd

eco

no

mic

imp

acts

:

Imp

act

on in

dige

nous

and

loca

l com

mun

ities

.

MIT

IGA

TIO

N M

EASU

RES

Con

stru

ctio

n of

pro

per

cam

psi

tes

and

firep

lace

s;

Regu

latio

n, s

uper

visi

on a

nd c

ontr

ol o

f to

uris

t ac

tiviti

es.

Prop

er s

iting

avo

idin

g ec

olog

ical

ly s

ensi

tive

area

s;

Awar

enes

s-ra

isin

g an

d tr

aini

ng o

f lo

cal c

omm

uniti

es a

nd v

isito

rs;

Sche

mes

for

sha

ring

bene

fits

from

eco

tour

ism

.

Proh

ibiti

on/r

estr

ictio

n on

tou

rism

in s

ensi

tive

site

s;

Rest

rictio

n on

the

ext

ract

ion

of p

lant

s or

oth

er r

esou

rces

inPr

otec

ted

Are

as (

in c

onsi

sten

cy w

ith t

heir

man

agem

ent

rule

s, s

eese

ctio

n E

of c

hap

ter

5);

Proh

ibiti

on o

n th

e hu

ntin

g or

rem

oval

of

enda

nger

ed p

lant

s an

dan

imal

s; P

rohi

bitio

n/re

stric

tion

on c

oral

col

lect

ion

and/

orex

trac

tion

or o

ther

mar

ine

life;

Awar

enes

s-ra

isin

g of

vis

itors

and

gui

des;

Sup

ervi

sion

and

con

trol

of

tour

ist

activ

ities

.

Prop

er w

aste

col

lect

ion

faci

litie

s an

d se

rvic

es

Invo

lvem

ent

of t

hese

com

mun

ities

in p

roje

ct d

esig

n;

Bene

fit-s

harin

g sc

hem

es.

MO

NIT

OR

ING

IN

DIC

AT

OR

S

Cha

nges

in t

he f

req

uenc

y an

d se

verit

y of

for

est

fires

.

Cha

nges

in o

ccur

renc

e of

wild

ani

mal

s;

Dep

th o

f ril

ls/g

ullie

s al

ong

trai

ls;

Cas

es o

f ill

egal

logg

ing

or la

nd c

onve

rsio

n;

Trai

ning

ses

sion

s fo

r lo

cal c

omm

uniti

es.

Wild

life

mon

itorin

g;

Cas

es o

f ill

egal

hun

ting;

Cas

es o

f co

ral c

olle

ctio

n;

Deg

rada

tion/

disa

pp

eara

nce

of p

lant

s, c

oral

s or

othe

r re

sour

ces.

Occ

urre

nce

of n

on-c

olle

cted

was

te a

t si

tes.

Stak

ehol

der

cons

ulta

tions

dur

ing

pro

ject

des

ign.

TAB

LE 6

- E

coto

uris

m: P

ract

ices

ass

ocia

ted

wit

h e

nvi

ron

men

tal r

isk.

Pos

sib

le a

dve

rse

imp

acts

, mit

igat

ion

mea

sure

s an

d in

dic

ator

s fo

r m

onit

orin

g.

Cam

psi

tes

and

co

oki

ng

fir

es w

ith

out

ad

equa

tep

rote

ctiv

e m

easu

res:


93

IMPA

CT

S

Pon

d c

ultu

re:

Con

tam

inat

ion

of d

owns

trea

mw

ater

-bod

ies

in p

artic

ular

whe

n dr

aini

ng p

onds

due

to e

xces

sive

org

anic

load

ing

and

accu

mul

atio

nin

pon

d w

ater

and

pon

d bo

ttom

sed

imen

ts;

Hig

her

risk

of d

isea

ses

amon

g cu

ltiva

ted

fish

rela

ted

to s

tres

s an

d, e

vent

ually

, in

nei

ghbo

ring

wild

pop

ulat

ions

;

New

bac

teria

l dis

ease

s du

e to

the

use

of

med

icat

ed f

eeds

.

Flo

atin

g c

ages

: co

ntin

uous

pol

lutio

n of

surr

ound

ing

wat

ers

and

bott

oms

whe

n ca

ges

are

in s

hallo

w w

ater

s;

Imp

act

on lo

cal f

auna

fro

m e

scap

es f

rom

cag

es.

Sem

i-in

ten

sive

an

d e

xten

sive

cul

ture

sys

tem

s

Larg

e se

ed m

orta

lity

rate

s of

non

tar

get

spec

ies

due

to t

he c

olle

ctio

n of

shr

imp

or

fish

seed

fro

mth

e w

ild;

Des

truc

tion

of m

angr

oves

and

wet

land

s fo

rco

nstr

uctio

n of

coa

stal

pon

ds;

exp

osur

e of

aci

dsu

lfate

soi

ls;

acce

lera

ted

coas

tal e

rosi

on b

yre

duct

ion

of m

angr

ove

fore

st;

Soils

and

gro

undw

ater

sal

iniz

atio

n du

e to

per

cola

tion

of s

altw

ater

;El

imin

atio

n/re

duct

ion

of lo

cal s

pec

ies

due

to t

hein

trod

uctio

n of

exo

tics

for

stoc

king

pur

pos

es;

Intr

oduc

tion

of d

isea

ses

due

to t

rans

fer/

imp

ort

ofse

ed.

MIT

IGA

TIO

N M

EASU

RES

Prop

er s

iting

of

pon

ds a

nd c

ages

avo

idin

g se

nsiti

ve w

ater

bod

ies;

Dis

tanc

e be

twee

n ca

ges

and

suffi

cien

t de

pth

to

redu

ce im

pac

ton

bot

tom

;

Use

of

rese

rvoi

rs f

or t

reat

men

t of

effl

uent

s in

pon

d fa

rms

or u

seof

pon

d re

circ

ulat

ing

syst

ems

to t

reat

wat

er.

Clo

sed

syst

ems

(i.e.

with

out

efflu

ent

disc

harg

e)

are

mor

e de

sira

ble

in in

tens

ive

syst

ems;

Use

of

vacc

ines

pre

fera

ble

to r

outin

e us

e of

ant

ibio

tics

and

chem

ical

s (u

se c

hem

ical

s an

d dr

ugs

only

in e

xtre

me

case

s w

hen

sym

pto

ms

of d

isea

se a

re a

pp

aren

t);

Use

of

spec

ies

pre

sent

in n

earb

y w

ater

s to

avo

id im

pac

ts o

nbi

odiv

ersi

ty.

Util

izat

ion

of h

atch

ery-

pro

duce

d se

ed f

or s

tock

ing;

Use

of

barr

en a

reas

bor

derin

g m

angr

oves

usi

ng p

ump

ing

and

not

tides

to

fill p

onds

, se

par

atio

n of

pon

d fa

rms

to a

void

cre

atio

nof

bar

riers

beh

ind

man

grov

es;

Avoi

d p

ond

cons

truc

tion

in c

oast

al a

reas

clo

se t

o ag

ricul

tura

lfie

lds

or f

resh

wat

er w

ells

. U

se o

f lin

ers

to a

void

wat

er p

erco

latio

nin

pro

xim

ity o

f ag

ricul

tura

l fie

ld a

nd f

resh

wat

er w

ells

whe

revi

able

;

Car

ry o

ut s

tudi

es o

n p

oten

tial i

mp

act

on e

xist

ing

faun

a p

rior

toin

trod

ucin

g a

new

sp

ecie

s in

an

open

wat

er b

ody.

Utm

ost

care

with

the

intr

oduc

tion

of p

reda

tor

spec

ies.

Imp

rove

reg

ulat

ions

on

intr

oduc

tions

;

Qua

rant

ine

pra

ctic

es f

or s

eed

and

intr

oduc

tions

; us

e of

hat

cher

yp

rodu

ced

cert

ified

dis

ease

-fre

e se

ed.

Imp

rove

d ed

ucat

ion

offa

rmer

s an

d im

pro

ved

regu

latio

ns o

n m

ovem

ents

of

seed

/adu

lts.

MO

NIT

OR

ING

IN

DIC

AT

OR

S

Cha

nges

in w

ater

qua

lity

with

in t

he s

yste

m a

nd in

neig

hbor

ing

wat

er b

odie

s;

Cha

nges

(de

grad

atio

n) in

bot

tom

fau

na a

nd f

lora

in t

he c

ase

of f

loat

ing

cage

s;

Cas

es o

f fis

h di

seas

e w

ithin

the

sys

tem

and

inne

ighb

orin

g w

ater

bod

ies;

ap

pea

ranc

e of

bac

teria

lst

rain

s re

sist

ant

to a

ntib

iotic

s;

Cha

nges

in c

omp

ositi

on o

f ca

tche

s in

sur

roun

ding

wat

ers.

Mon

itorin

g of

see

d co

llect

ors

oper

atio

n, c

hang

es in

spec

ies

abun

danc

e an

d co

mp

ositi

on in

cat

ches

of

fishe

rmen

;

Test

ing

of s

oils

for

pot

entia

l aci

dity

prio

r to

pon

dco

nstr

uctio

n;

Mea

sura

ble

incr

ease

in s

alin

ity in

wat

er e

xtra

cted

from

coa

stal

wel

ls n

ear

aqua

cultu

re f

arm

s;

Dis

pla

cem

ent

or e

limin

atio

n of

loca

l fis

h sp

ecie

s;

Occ

urre

nce

of e

pid

emic

s or

not

icea

ble

pre

senc

e of

dise

ase

in f

arm

s or

sur

roun

ding

wat

er b

odie

s.

TAB

LE 7

- A

qua

cult

ure:

Pra

ctic

es a

ssoc

iate

d w

ith

en

viro

nm

enta

l ris

k. P

ossi

ble

ad

vers

e im

pac

ts, m

itig

atio

n m

easu

res

and

ind

icat

ors

for

mon

itor

ing

.

Inte

nsi

ve a

nd

sup

er-i

nte

nsi

ve c

ultu

re:


94

IMPA

CT

S

Com

pac

tion

of s

oil d

urin

g co

nstr

uctio

n;

Slop

e an

d riv

erba

nk d

esta

biliz

atio

n: la

ndsl

ides

,co

llap

se o

f gu

llies

and

ste

ep s

lop

es,

side

-tip

pin

g of

spoi

l mat

eria

l;

Deg

rada

tion

of v

eget

atio

n al

ong

river

bank

s, r

oad

bed

or a

t si

tes

whe

re c

onst

ruct

ion

mat

eria

ls a

redr

awn;

Hyd

rolo

gica

l cha

nges

(e.

g. in

crea

sed

runo

ff an

dflo

odin

g, w

ater

flow

div

ersi

on,

chan

nel

mod

ifica

tion)

;

Eros

ion

due

to t

he a

bove

rea

sons

;

Clo

ggin

g of

dra

inag

e w

orks

, cr

eatio

n of

sta

gnan

tw

ater

poo

ls;

Silta

tion,

sed

imen

tatio

n an

d de

grad

atio

n of

w

ater

bodi

es;

Cha

nges

in g

roun

dwat

er t

able

leve

ls;

Con

tam

inat

ion

and

heal

th r

isks

fro

m o

il an

dha

zard

ous

was

te;

Dus

t an

d no

ise

durin

g

Acc

ess

to p

revi

ous

ly is

ola

ted

are

as:

Rest

rictio

n of

bio

logi

cal c

orrid

ors,

bar

riers

to

the

free

mov

emen

t of

wild

life;

Dis

rup

tion

or d

estr

uctio

n of

wild

life,

roa

d ki

lls;

Loss

, fr

agm

enta

tion

and

dist

urba

nce

of n

atur

alha

bita

ts (

incl

. aq

uatic

);

Dis

turb

ance

of

pro

tect

ed a

reas

, th

reat

s fo

ren

dang

ered

sp

ecie

s;

Incr

ease

in f

ores

t fir

es c

ause

d by

incr

ease

d hu

man

activ

ity;

Illeg

al h

untin

g, s

ee T

able

5;

MIT

IGA

TIO

N M

EASU

RES

Car

eful

rou

te a

nd s

ite s

elec

tion

avoi

ding

ste

ep s

lop

es a

nd r

iver

sw

ith lo

w f

low

, m

inim

izin

g cu

ttin

g of

tre

es,

min

imiz

ing

num

ber

ofw

ater

cro

ssin

gs a

nd d

isru

ptio

n in

wat

erflo

ws;

Car

eful

des

ign

to m

inim

ize

imp

acts

of

wat

er c

ross

ings

, to

bal

ance

fillin

g an

d cu

ttin

g, a

nd t

o av

oid

crea

tion

of s

teep

cut

slo

pes

;

Buffe

r zo

nes

betw

een

road

and

wat

er b

odie

s;

Con

stru

ctio

n in

dry

sea

son;

Ensu

re u

se o

f p

rop

er a

nd a

pp

rop

riate

con

stru

ctio

n st

anda

rds

(incl

. p

rote

ctio

n of

soi

ls d

urin

g co

nstr

uctio

n, c

onst

ruct

ion

site

clea

n-up

and

reh

abili

tatio

n);

Prop

er d

rain

age

and

infil

trat

ion

ditc

hes;

Stab

iliza

tion

of v

ulne

rabl

e su

rfac

es:

terr

aced

slo

pes

, re

tain

ing

wal

ls/p

onds

, b

arrie

rs,

ripra

p,

grid

wor

k, c

rib w

alls

etc

.;

Rep

lant

ing

(with

nat

ive

spec

ies)

ear

ly in

the

con

stru

ctio

n p

roce

ss;

Prop

er d

isp

osal

of

oil a

nd h

azar

dous

mat

eria

ls;

Dus

t co

ntro

l by

wat

er a

nd o

ther

mea

ns.

Car

eful

rou

te a

nd s

ite s

elec

tion

to a

void

imp

orta

nt h

abita

ts,

sens

itive

or

pro

tect

ed a

reas

;

Con

serv

atio

n of

nat

ural

cor

ridor

s;

Cre

atio

n of

ani

mal

cro

ssin

gs u

nder

and

ove

r ro

ads,

fen

cing

;

No

cons

truc

tion

durin

g br

eedi

ng s

easo

n;

Awar

enes

s-ra

isin

g an

d tr

aini

ng a

mon

g ru

ral c

omm

uniti

es o

nsu

stai

nabl

e us

e of

for

este

d ar

eas

and

thei

r re

sour

ces;

Vigi

lanc

e an

d m

onito

ring

by b

oth

loca

l com

mun

ities

and

pol

ice

and

wild

life

auth

oriti

es;

Esta

blis

hmen

t an

d m

aint

enan

ce o

f fir

ebre

aks;

MO

NIT

OR

ING

IN

DIC

AT

OR

S

Cha

nge

in a

rea

of d

enud

ed s

lop

es/l

engt

h of

exp

osed

riv

erba

nks;

Num

ber

of la

ndsl

ide

case

s af

fect

ing

traf

fic;

Cha

nge

in t

he h

eigh

t of

roo

t p

edes

tals

;

Acc

umul

atio

n of

silt

/san

d at

the

foo

t of

bus

hes,

pos

ts a

nd f

ence

s;

Dep

th o

f ril

ls/g

ullie

s;

Cha

nges

in y

ield

s in

nei

ghbo

ring

field

s;

Flow

and

sed

imen

t lo

ads

in s

trea

ms

if da

taav

aila

ble

from

a n

earb

y hy

drol

ogic

al s

tatio

n;

Visi

ble

chan

ges

in w

ater

qua

lity

in n

eigh

borin

gw

ater

bod

ies;

Cha

nges

in w

ater

tab

le le

vels

in w

ells

;

Cha

nges

in f

ish

catc

hes

from

the

affe

cted

wat

erbo

dy;

Cha

nges

in le

vels

of

wat

er-r

elat

ed d

isea

ses.

Cha

nges

in o

ccur

renc

e of

wild

ani

mal

s;

Cha

nges

in h

untin

g/fis

h ca

tche

s;

Rate

s of

ext

ract

ion

of t

imbe

r an

d no

n-tim

ber

fore

stp

rodu

cts;

Cas

es o

f ill

egal

logg

ing/

land

con

vers

ion.

TAB

LE 8

- S

mal

l rur

al a

cces

s ro

ads

and

bri

dg

es: P

ract

ices

ass

ocia

ted

wit

h e

nvi

ron

men

tal r

isk.

Pos

sib

le a

dve

rse

imp

acts

, mit

igat

ion

mea

sure

s an

d in

dic

ator

s

for

mon

itor

ing

.

Imp

act

on

so

il an

d w

ater

bo

die

s:


95

IMPA

CT

S

Def

ores

tatio

n an

d lo

ss o

f bi

odiv

ersi

ty f

rom

incr

ease

d lo

ggin

g, t

ouris

m,

and

conv

ersi

on o

ffo

rest

are

as in

to p

astu

re o

r fa

rmla

nd.

Soci

al im

pac

ts:

Loss

of

build

ings

, p

rop

erty

, o

r ec

onom

icliv

elih

ood;

Imp

act

on h

uman

hea

lth f

rom

tra

ffic

acci

dent

s an

dtr

ansm

issi

on o

f di

seas

es a

long

roa

ds;

Deg

rada

tion

of h

isto

rical

/cul

tura

l site

s;

Soci

al c

hang

es f

rom

new

roa

ds t

o is

olat

edco

mm

uniti

es;

Imp

acts

on

indi

geno

us p

eop

le.

MIT

IGA

TIO

N M

EASU

RES

Elim

inat

ion

of f

lam

mab

le m

ater

ials

in c

onst

ruct

ion;

Educ

atio

nal p

rogr

ams

to r

educ

e th

e in

cide

nce

of f

ires;

Esta

blis

hmen

t of

pro

tect

ed a

reas

.

Car

eful

rou

te s

elec

tion

avoi

ding

eco

nom

ic lo

sses

, in

dige

nous

peo

ple

s la

nds,

cul

tura

l site

s, e

tc.;

Safe

ty d

esig

ns:

regu

latio

n, s

ignp

ostin

g, v

isib

ility

, sp

eed

limits

,et

c.;

Spec

ial m

easu

res

to p

rote

ct c

ultu

ral s

ites.

MO

NIT

OR

ING

IN

DIC

AT

OR

S

Traf

fic a

ccid

ents

;

Dis

ease

cas

es.

Acc

ess

to p

revi

ous

ly is

ola

ted

are

as:


96

IMPA

CT

S

Con

tam

inat

ion

of s

urfa

ce a

nd g

roun

dwat

er f

rom

was

tew

ater

at

site

or

dow

nstr

eam

;

Low

erin

g of

wat

er t

able

due

to

over

exp

loita

tion;

Cre

atio

n of

sta

gnan

t w

ater

poo

ls;

Unp

leas

ant

odor

s;

Deg

rada

tion

of s

oil c

over

and

veg

etat

ion;

Dis

turb

ance

of

natu

ral h

abita

ts a

nd w

ildlif

e;

Incr

ease

in w

ater

born

e di

seas

es.

Solid

was

te c

olle

ctio

n/d

isp

osa

l:

Pollu

tion

of s

urfa

ce a

nd g

roun

dwat

er f

rom

land

fill;

Smog

, ha

ze a

nd p

artic

ulat

e co

ntam

inat

ion

from

burn

ing

garb

age

(incl

. im

pac

t on

hum

an h

ealth

);

Unp

leas

ant

odor

s;

Con

tam

inat

ion

and

heal

th r

isks

fro

m h

azar

dous

was

te;

Dis

ease

tra

nsm

issi

on;

Unp

leas

ant

livin

g co

nditi

ons

clos

e to

site

.

Co

nst

ruct

ion

of

bui

ldin

gs

(hea

lth

cen

ters

etc

.):

Wat

er a

nd s

oil c

onta

min

atio

n fr

om b

uild

ing

was

te;

Deg

rada

tion

of v

eget

atio

n at

site

and

alo

ngtr

ansp

ort

rout

es;

MIT

IGA

TIO

N M

EASU

RES

Sitin

g st

udie

s to

avo

id s

ensi

tive

site

s;

Con

sulta

tion

and

par

ticip

atio

n of

all

affe

cted

com

mun

ities

;Re

gion

al w

ater

use

pla

nnin

g;

Min

imal

dis

tanc

e fr

om h

uman

set

tlem

ents

and

fie

lds;

Prop

er d

rain

age;

Was

tew

ater

tre

atm

ent

syst

ems:

set

tling

pon

ds,

scre

ens,

aer

atio

nsy

stem

s, c

onne

ctio

n to

larg

er s

ewag

e sy

stem

s;

Odo

r-co

ntro

l tec

hnol

ogy;

Soil

and

vege

tatio

n p

rote

ctio

n du

ring

cons

truc

tion,

sta

biliz

atio

n(e

.g.

re-v

eget

atio

n);

Op

erat

ion

and

mai

nten

ance

pla

ns a

nd t

rain

ing;

Prot

ectio

n fr

om li

vest

ock;

Wat

er q

ualit

y te

sts;

Hyg

iene

tra

inin

g.

Sitin

g st

udie

s (c

over

ing

also

tra

nsp

ort

need

s);

Prop

er d

esig

n of

col

lect

ion

and

disp

osal

sys

tem

s;

Prop

er d

rain

age;

Spre

ad a

nd c

over

gar

bage

at

land

fill s

ite,

pro

hibi

t or

min

imiz

ebu

rnin

g;

Sep

arat

e di

spos

al s

yste

m f

or m

edic

al o

r ha

zard

ous

was

te;

Op

erat

ion

and

mai

nten

ance

pla

ns a

nd t

rain

ing;

Recy

clin

g p

rogr

ams;

Safe

ty p

roce

dure

s an

d tr

aini

ng.

Prop

er s

iting

and

sel

ectio

n of

tra

nsp

ort

rout

es;

Prot

ectio

n of

soi

l sur

face

s an

d ve

geta

tion

durin

g co

nstr

uctio

n;

Dus

t co

ntro

l by

wat

er o

r ot

her

mea

ns;

MO

NIT

OR

ING

IN

DIC

AT

OR

S

Cha

nges

in w

ater

tab

le le

vels

in w

ells

;

Wat

er q

ualit

y in

wel

ls (

if m

easu

rem

ents

per

form

ed);

Visi

ble

chan

ges

in w

ater

qua

lity

in r

ecei

ving

w

ater

bodi

es;

Size

of

area

of

degr

aded

veg

etat

ion

at s

ite;

Num

ber

of o

per

atio

n an

d m

aint

enan

ce p

lans

and

regi

onal

wat

er u

se p

lans

;

Dis

ease

cas

es.

Wat

er q

ualit

y in

wel

ls (

if m

easu

rem

ents

per

form

ed);

Visi

ble

chan

ges

in w

ater

qua

lity

in r

ecei

ving

w

ater

bodi

es;

Num

ber

of o

per

atio

n an

d m

aint

enan

ce p

lans

;

Illeg

al la

ndfil

ls;

Cas

es o

f ga

rbag

e bu

rnin

g;

Dis

ease

cas

es.

Wat

er q

ualit

y in

wel

ls (

if m

easu

rem

ents

per

form

ed);

Visi

ble

chan

ges

in w

ater

qua

lity

in r

ecei

ving

w

ater

bodi

es;

TAB

LE 9

- S

mal

l soc

ial i

nfr

astr

uctu

re in

vest

men

ts: P

ract

ices

ass

ocia

ted

wit

h e

nvi

ron

men

tal r

isk.

Pos

sib

le a

dve

rse

imp

acts

, mit

igat

ion

mea

sure

s an

d in

dic

ator

s fo

r m

onit

orin

g.

Wat

er s

upp

ly a

nd

san

itat

ion

:


97

IMPA

CT

S

Wat

er c

onta

min

atio

n fr

om in

adeq

uate

san

itatio

n;

Acc

umul

atio

n an

d so

il co

ntam

inat

ion

from

sol

idw

aste

;

Con

tam

inat

ion

and

heal

th r

isks

fro

m m

edic

alw

aste

;

Con

stru

ctio

n ac

cide

nts.

Dus

t an

d no

ise

durin

g co

nstr

uctio

n;

Dis

turb

ance

of

habi

tats

and

wild

life;

MIT

IGA

TIO

N M

EASU

RES

Con

trol

and

dai

ly c

lean

ing

of c

onst

ruct

ion

site

s;

Prov

isio

n fo

r ad

equa

te w

aste

dis

pos

al a

nd s

anita

tion

durin

gco

nstr

uctio

n an

d op

erat

ion;

Sep

arat

e di

spos

al f

acili

ties

for

haza

rdou

s w

aste

;

Spec

ial a

tten

tion

to d

rain

age;

Safe

ty m

easu

res

and

pro

cedu

res.

MO

NIT

OR

ING

IN

DIC

AT

OR

S

Size

of

area

of

degr

aded

veg

etat

ion

at s

ite;

Dis

ease

and

acc

iden

t ca

ses.

Co

nst

ruct

ion

of

bui

ldin

gs

(hea

lth

cen

ters

etc

.):



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

RURALINVEST

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 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.


Following on from earlier needs identification and project definitionactivities, Module 3 provides guidelines to assist local technical staffin developing high quality project proposals suitable for externalappraisal and subsequent monitoring and evaluation. Drawing onMS Windows-compatible software which can be extensivelycustomised to meet user needs, the Module facilitates thepresentation of essential project data and automates key calculationssuch as cash flow, working capital requirements, rates of return,employment generation and costs per beneficiary. The Modulecomprises this technical manual, software with a user’s guide, andtraining materials with an associated instructor’s guide.

MODULE 3


MODULE 3


R U R A L I N V E S T



TC/D/A1421E/1/11.07/500

Documents

MODULE 3 RURALINVEST MODULE 3 · 2017-11-28 · Module 3: Detailed Project Formulation and Analysis Following on from earlier needs identification and project definition activities,