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PROJECT MANAGEMENT

UNIT II
Project Identification and
Formulation

Project Environment
Surroundings in which a project is undertaken. It
includes,
Air
Water
Land
Natural Resources
Pollution
Humans and their interaction- social, political
and economic both within and outside the
project boundaries

Project Identification
Search for project ideas
----Requires
Imagination
Sensitivity to environmental changes
Realistic assessment of what the firm can
do

Idea Generation
New ideas-Technological breakthrough
Product variantsexisting fields of technology
Clear articulation of objectives---Cost reduction
Productivity improvement
Increase in capacity utilisation
Improvement in contribution margin
Expansion into promising fields
Conducive climate to encourage creativity of employees
SWOT Analysis

Investment Opportunities
Corporate Appraisal

Tools for Identifying Investment Opportunities


Porters Model
Lifecycle Approach
Experience Curve

Scouting Project Ideas


Analyze the performance of existing
Industries
Examine the inputs and output of various
industries
Review imports and exports
Study Plan Outlays and Govt guide lines
Suggestions of financial institutions and
development agencies

Scouting Project Ideas

Available Local Materials and Resources


Analyze Economic and Social trends
New Technological Developments
Draw clues from consumption abroad
Revival of Sick units
Unfulfilled psychological needs
Trade fairs
Stimulate Creativity
Chance Factor

Project Screening
Preliminary Screening
Compatibility with the promoter
Consistency with governmental
priorities
Availability of Inputs
Adequacy of market
Reasonableness of cost
Acceptability risk level

Project Screening
Project Rating Index
Factor

Factor
Weight

Rating
VG
5

G
4

A
3

Factor
Score
P
2

VP
1

Input Availability

0.25

Technical Know-how

0.10

0.40

Reasonableness of Cost

0.05

0.20

Adequacy of Market

0.15

Complimentary Relationship with other


Products

0.05

0.20

Stability

0.10

0.40

Dependence on firms strength

0.20

Govt Priorities

0.10

0.75

1.00

Rating Index

0.75

0.30
4.00

Stages of a Project Formulation


Objective Define the project boundaries with limited information available.
Issues to be addressed
Industrial outlook, Competitive trends
Project for domestic demand/export or both
Location, size and scale
Access to raw materials and markets for products
Technology options
Environmental stipulations
Investment and financing outlook
Desirable to have a PMC in place at this juncture

Formulation-where does it all begin?


Idea
Generation

Brain
Storming

Options

SWOT

Alternatives
Initial
Vision Plan

Visualizing the Project


Development of Vision Influencing Factors
Business
Applications

Cash Flow

Return on Investment

Growth

Strategic
Considerations
Available
Options Conversion Options

External Factors
Market Demands &
Prices
Available Crudes
& Prices

Emissions & Product


Quality Legislation
Supply Options

Road Map to the Future


Long Term
Vision
Factors
Where TO?
How TO?
WHAT are the costs benefits, risks
and financial sensitivities?

Develop
Options
Evaluate

Future
Configuration

Stages of a Project-Development
Objective:
Facilitate an investment decision
Issues to be addressed
Infrastructure-raw material receipt and product
evacuation, location and site development
requirements, water intake and treatment, enabling
facilities for construction.
Technology selection and integration of various
processes into one composite scheme to meet the
project objectives
Investment and economic analysis
Project financing
Output-Project Feasibility Report and recommendation of
project implementation approach

Stages of a ProjectDefinition
Crucial Stage for the project as it is the final gate for approval or
otherwise.
Project owner should have the approval for expenditure towards
Basic design and engineering.
Detailed cost estimates and project schedules to be prepared,
with appropriate value engineering carried out for cost
rationalization, overall process integration, optimization of utility
and offsite systems design and project implementation approach
Output- Front end loading report with detailed cost estimates and
packages that are good for inviting bids from EPC/EPCM contractors

Implementation Sequence
SUPPORT

PROCESS DESIGN

DESIGN
BASIS

CONCEPTUAL
PROCESS DESIGN

ENGINEERING

ADVANCE CONTROLS & OPTIMISATION


MATERIALS & MAINTENANCE
ENERGY & ENVIRONEMNT
OPERATIONS,SAFETY & HAZARDS

DETAIL PROCESS
DESIGN

CONSTRUCTION

BASIC FRONT
END DESIGN

CONTRACTS

BID PACKAGE FOR


EPC/LSTK BIDDING

COMMERCIAL
TERMS &
CONDITIONS

Project Management Managing all players


EXTERNAL LINKAGES
INCLUDING
STATUORY

OWNER
MANAGEMENT

COMMISSIONING
& HANDING OVER

CONFIGURATION
& DESIGN BASIS
CONSTRUCTION
PROCESS
DESIGN

FRONT END
ENGG

PROJECT
MANAGEMENT
EQUIPMENT
DELIVERIES

DETAIL ENGG.
BID PACKAGE
&
CONTRACTOR
SELECTION

VENDORS
CONTRACTORS EPC
CONTRACTORS

PROJECT FORMAT
1. INTRODUCTION
2. PRODUCT
2.1 Applications
2.2 Availability of technology and compliances

3.MARKET POTENTIAL
3.1. Demand and Supply
3.2. Marketing Strategy
4.MANUFACTURING PROCESS

PROJECT FORMAT
5.CAPITAL INPUTS
5.1. Land and Buildings
5.2. Machinery
5.3. Miscellaneous Assets
5.4. Raw Materials and Packing Materials
6. MANPOWER REQUIREMENTS
7. IMPLEMENTATION SCHEDULE
8. DETAILS OF THEPROPOSED PROJECT

PROJECT FORMAT

8.1 Building
8.2 Machinery
8.3 Miscellaneous Assets
8.4 Preliminary & Pre-operative Expenses
8.5 Working Capital Requirements
Particulars of Margin from promoters and
Bank
8.6 Cost of the Project & Means of Finance

PROJECT FORMAT
9. PROFITABILITY CALCULATIONS
9.1 Production Capacity & Build-up
9.2 Sales Revenue at 100%
9.3 Raw and Packing Materials Required at 100%
9.4 Utilities
9.5 Selling Expenses
9.6 Interest
9.7 Depreciation

PROJECT FORMAT
10. PROJECTED PROFITABILITY
A. Installed Capacity
B. Cost of Production
C. Profit before Interest & Depreciation

PROJECT FORMAT
11.BREAK EVEN ANALYSIS
ANALYSIS WITH FACTORS GIVEN BELOW
[A] Sales
[B] Variable Costs
[C] Contribution
[D] Fixed Cost
[E] Break-Even Point

PROJECT FORMAT
12.FINANCIAL ANALYSIS
Pay Back Period
Debt Service Coverage Ratio (DSCR
Internal Rate of Return (IRR)
Net Present Value (NPV)

PRIVATIZATION-APPROACHES

BOOM-Build, Own, Operate & Maintain


BOT---Build, Operate & Transfer
BOO-Build, Own & Operate
BOOT-Build, Own Operate& Transfer

Customer Benefits- BOOM

Little risk
No capital employed in non core business assets
No need to operate or maintain equipment
Assurance of a well-run and well-operated system
Significant cost savings
Considerable reduction in costs.
Costs fixed for the term of the contract
Lower environmental liability

Customer Benefits
Little risk
No capital employed in non core business
assets
No need to operate or maintain equipment
Assurance of a well-run and well-operated
system
Significant cost savings
Costs fixed for the term of the contract
Lower environmental liability

BOT/BOOT
Concessions from Government/ Public/
Private Sector
Finance, design, construct & operate a
facility
Contract period
Project proponents recover investments &
operating and maintenance expenditure
Infrastructure to be transferred after
concession period

BOT/BOOT
Extensive application in infrastructure
projects and in publicprivate partnership.
A third party
design and construct infrastructure
operate and maintain these facilities for a
certain period.

BOT/BOOT
Responsibility to raise the finance for the
project
Entitled to retain all revenues generated
by the project
Owner of the regarded facility.

BOT/BOOT

The facility will then transferred at the end


of the concession agreement, without any
remuneration of the private entity involved.