Lecture 7: Basics of Project Planning

1. Lecture 7: Basics of Project Planning

2. Learning Objectives • Part 1: Introduce concepts, procedures regarding the analysis of agri/aquaculture projects • Part 2: Sources of funding and tactical objectives

3. The Project Concept • All projects suffer from poor preparation • Project planning: identifies national, regional and/or company goals • selects priority areas of development (hatchery, farm, processing plant?) • designs effective pricing policies • mobilizes necessary resources

4. Why is Planning Required? • Waste is a tragic loss to poor countries • Projects are typically underestimated with respect to time and effort • When money sits in a bank, the bank does not care, you still have to pay debt service • He who hesitates is lost.

5. What is a Project? • Definition: the whole complex of activities using resources to gain benefits • investment activity: cash, equity, long-term financing • financial resources are expended • capital assets are created • benefits hopefully appreciate over time

6. Characterizing Aquaculture Projects • Two types: economic development and private company (firm) type • large scale economic development type projects are part of a large program (e.g., World Bank irrigation projects) • can even be divided into smaller subprojects (e.g., CJEDP) • usually involve local counterparts • sometimes funded and administered by two different governments

8. Private Investment (Firms) • Usually small, minimum size from a financial standpoint • technologically, administratively feasible • specific starting point and end point • specific objectives • boundaries and clientele clearly defined • wholly independent administrative structure • funded through a mix of cash, equity, long-term financing

9. Project Planning • Most important factor is to have good planning • information includes potential and ongoing investments in the area • What effect will these investments have on growth? How will they affect your project? How much can be spent over duration of the project? • What resources are available for specific investment?

10. Project Planning • Projects are usually selected based in part on numerical indicators of value of costs and returns (ROI, NPV, IRR, etc.) • large-scale projects look at the same as above, but also national income, income of typical farmer • the typical yardstick might be market price (actual price at which goods and services are traded) • sometimes market price is not used; instead, a better indicator of value (shadow price) is used (shadow price = value based on scarcity of the resource)

11. Project Planning • Good planning also helps provide financial assistance to both types of projects • large-scale projects often concentrate on investment from outside sources (e.g., the World Bank) • often suggested they also look at local assistance (local development banks); however, criteria are different • small-scale projects often have to look both inside the country and outside • Homework: come up with a concept/name for your project, create a list of possible funding sources available to aquaculture projects

12. Project Planning Targets • Large-scale projects target broader implications than private investment projects (e.g., social benefit, national income) • helpful to scrutinize just what are the policy or production targets • in large-scale projects, the issue of planning is often complicated by a need to coordinate with other plans and investments • both project types must consider scarcity of investment funds, foreign exchange rates, labor issues, etc.

13. The Project Format - Its Advantages • Advances/assesses by organizing info from many sources • gives ideas on cost, year by year, effects on participants, possible incentives • allows better judgement re-organization, administration problems are faced head-on • gives mgrs/planners better criteria for monitoring progress/implementation • encourages checking-out other alternatives • controls reliability of data • format well-suited to production projects w/clear-cut investments, valued costs/benefits

14. Project Preparation and Analysis • Only when all the aspects of a project are taken into consideration can its financial impact be truly realized - Why? • All elements are inter-related • Judgements about one affect the other • As project analysts, your job is to continually question technicians as to whether all aspects have been considered

15. The Project Cycle • Five phases: • 1) identification(finding the project) • 2) prep/analysis (Does it have merit?) • 3) appraisal (critical review, independent) • 4) implementation (getting it started) • 5) evaluation (success or failure)

16. Identification Phase • Involves finding individual projects • usually identified by technical specialists, sometimes politicians • sometimes identified from other proposals to extend on-going programs • suggestions often arise due to present or anticipated lack of supply of some product • can be identified via common knowledge, market trends, import statistics • also by existing EDP’s, bank reports, etc.

17. Preparation/Analysis Phase • This includes all work done to bring the project to the point of appraisal • first step: feasibility study or business plan • these documents define objectives, suggest alternatives, indicate most efficient plan, convince • includes a preliminary financial or economic analyseis (better now vs. later) • nothing moves forward without financials

18. Preparation/Analysis Phase • Business plans and feasibility studies take time and money • business plan: about two months • feasibility study: compares projects, longer • costs are as high as 10% of project value • regained as improved ROI • undertaken by special team of consultants

19. Appraisal Phase • Critical review, independent evaluation • re-examines every aspect of the project plan to assess its logic/value prior to release of big money • may involve new information • required by most funding agencies • feasibility study read/approved by someone outside the agency

20. Implementation Phase • Objective of previous phases is to have a project that can be implemented to the benefit of recipients • the better and more realistic the project plan, the easier to implement • more likely it will be successful or beneficial • implementation needs to be flexible, though, considering changes in prices and technology • the greater the uncertainty or novelty of the project, the more changes will occur

21. Evaluation Phase • This phase regards evaluation of success or failure elements of a project with relevance to the future • usually takes place throughout the project, but sometimes only at the end • undertaken by sponsoring company, agency, etc. • some projects have separate internal units for this or use outsiders • Are or have objectives being/been met? If not, were the objectives realistic?

22. Evaluation Phase • Was the technology proposed appropriate? • Were the institutional, management arrangements suited to the conditions? • Were the financial aspects carefully worked out? • Were the economic aspects carefully explored? • Did management quickly respond to changes? • Was its response carefully considered and appropriate? • How could the project’s structure be changed to make it more flexible?

23. Accuracy of Project Analysis • They are supposed to be the basis for investment decisions; however … • How accurate are they in foretelling future results? • Usually take the shape of performance reviews at end of implementation phase • typical indicator is ROI • most EDP’s yield 20-25% returns • however, ROI is misleading due to changes in prices • poor financial predictability is the result of inappropriate technology, poor management, delays

24. Why Projects Often Go Wrong • When analysis fails to predict project success, it is likely due to poor project design and faulty implementation • projects are then typically audited to determine the reasons for poor performance • inappropriate technology • inadequate support systems/infrastructure • failure to appreciate social environment • administrative problems • adverse policy environment

25. Part 2: Sources of Funding

26. Learning Objectives • Strategic policy objectives in setting up projects • Investment strategies • Tactical objectives • Sources of funding • Investment appraisal methods, indices

27. Introductory Comments • Setting up an aquaculture project typically requires substantial investment • financial implications must be addressed well in advance • we will look at the likely costs of such projects • focus on ideas which are most critical

28. Strategic/Policy Objectives of Aquaculture Projects • Governmental agencies: social benefit, national income via increased taxation • Development agencies: social benefit, securing of resources • others: attracting foreign investment, improving balance of trade, transmigration • aquaculture investors, analysts must weigh the good against the bad

29. Socio-economic benefits derived from an aquaculture project Individual Improved Std. Of Living Income Family Employment Municipal Taxes National/Community Development National AQUACULTURE PROJECT Import Substitution Foreign Exch. Savings Domestic Market Supply of Product Additional Supply Lowering of Prices Production Export Market Increased Foreign Exchange Reserves Stimulation of Economy Demand for Materials Domestic Market

30. How Aquaculture Projects Attract Foreign Investment • Relaxing exchange controls • flexibility in foreign:local joint ventures • simplifying legal requirements/red tape • providing training, information, support • promoting auxiliary industries (feed mills, processing plants, etc.) • cutting duties on imports of equipment and raw materials • providing tax “holidays” during implementation phase • permitting repatriation of profits/assets • providing infrastructure (aquaparks)

31. Investment Strategies • Private ventures range in size from large, vertically integrated firms to small backyard operations • single common element: profit • investment decisions vary dependent upon scale • large companies usually look at long-term trends, look at product cycling • sometimes invest in unprofitable pilot projects in order to receive better future return

32. Investment Strategies: smallholders • Aquaculture often serves as an alternative to other activities • examples: agriculture, salt production • switching to aquaculture almost always means loss of income from established crops • “low risk” culture practices are often used to keep impact to a minimum • focus is on profitability of each run • farmer needs other occupation, income to cover periods of no aquaculture activity

33. Aquaculture and Farm Income • Introducing aquaculture to smallholders can help raise their income • however: sources of inputs (fry) must be available • markets must be accessible • usually finfish production can produce greater yields for less input (more forgiving) • crustacean culture requires higher costs for lower yields • finfish production techniques are simpler • lower value of finfish also keeps it in local markets

34. Overlap Between Private Sector and Public Sector • Allows for cooperation and coordination of effort • government hatcheries are good example • contract growing schemes (nucleus estate planning) • passing of laws specific to aquaculture • organization of meetings, conferences, seminars

35. Tactical Development Objectives • Often specified with respect to desired rate of return (ROI) • other criteria used: net profit before taxes, cashflows, net present value • returns reflect the sources of and cost of the capital employed: • the cost of risk venture capital or equity depends upon return expected by shareholders

36. Tactical Objective: debt:equity • Cost of funds borrowed from a funding/loan institution vary according to interest rates, duration, size of loan • cost of loans is less than the cost of risk equity • average cost of capital is dependent upon “gearing ratio” (debt:equity ratio) • when interest rates are low, D/E ratio is high • equity-based companies do better when interest rates are high

37. Tactical Objectives: rate of return • What is an appropriate rate of return? • Aquaculture represents risk and is hazardous compared to other ventures • therefore it must generate higher than normal returns to be attractive/worthwhile • most banks look at 20-25% ROI as favorable • other option is to assign a risk premium of 5% over normal return • the higher the intensity or more untried the technology, the higher the risk premium

38. Funding Sources • There are two basic sources of funding: 1) capital assistance and 2) private investment • capital assistance = loans, grant aid, cash grants • for developing nations, this comes from external loans (World Bank, Commonwealth Development Corporation, Banco International de Desarollo, etc.) • grant aid: USAID, UNIDO, WHO, Swiss, Japanese, Norwegians • developed countries: subsidies and enterprise grants

39. Funding Sources: capital assistance • Most loans provided are low interest rate, extended repayment, concessionary in nature • high percentage of Asian Development Bank loans are for aquaculture • around 10% of all aquaculture loans are via the World Bank • grant-aid/grants are not paid back, real benefit is in reducing trade imbalances • assistance is often provided in form of technology

40. Funding Sources: credit institutions • These sources are typically accessed by smallholders • consist of agricultural, fisheries and cooperative banks with numerous branches • small loans are provided promptly with minimum bureaucracy • some technical and marketing assistance provided • briefing to farmers on purpose and use of credit should also be provided (not often)

41. Funding Sources: private investment • Can be foreign or domestic • private or public sale of equity (shares/stock) • backed up by commercial financing • sometimes referred to as venture capital or equity • venture capital available through specialized companies (CAIM) • they expect high rates of return and consider capital needs of aquaculture firms typically too small

42. Funding Sources: venture capital • Criteria include: annual growth rates of 25-50% • pre-tax margins of at least 35% • minimum ROI of at least 30% • public offering of stock in 5-8 years • must be unique technology • 30% ownership of project by venture capital firm • minimum investment of around $500,000 • exit strategy on public sale of 4-7x

43. Funding Sources: public sales • Accomplished through offering of sales • large publicly-traded companies offer shares for sale, but often not in reference to only their aquaculture efforts • aquaculture is considered a diversification

44. Funding Sources: joint ventures • Developing nations have attracted foreign investment via aquaculture • Why? Land is cheaper, labor cheap, favorable climate • often this is an arrangement between a local owner and foreign investor • production targets the export market due to limited local market (product too expensive) • regulations as to percentage ownership vary

45. Funding Sources: joint ventures • Many joint ventures with foreigners call for foreign partner providing technical expertise • if “technical expertise” has no experience within country, project usually started as a pilot • only if technical experts are really experienced should construction start immediately • site must achieve recommended criteria

46. Funding Sources: joint ventures • Most loan institutions consider cash king • consultants taking an equity position can seldom convince them to recognize their consulting rates • equity fund/venture capital partners are very skeptical of anything but cash • they will want to see the company established, land purchased, business plan, financials, distribution of shares, compensation packages, etc. prior to taking the plunge

47. Evaluating Joint Venture Partners • Partners can be cash or in-kind (e.g., land) participants • if in-kind (“sweat equity”), the value of shares is often less than par value • if parnters come in late, they don’t receive a 1:1 (par) disbursement of shares • if land is to be used as equity, have it appraised by three parties: your own appraiser, the land owner’s appraiser, and by a neutral third-party (take the average)

48. Other Funding Issues • Aquaculture’s bad track record on debt service, loan payback (examples) • simple ignorance of aquaculture on part of funding agencies • most companies go bankrupt due to lack of cash (undercapitalized), not lack of profits • financial crisis often result in rapid failure, whereas biological crisis can be solved • recognition of adequate funds for implementation phase is critical