Lecture 6: Setting up the Project

Lecture 7: Basics of
Project Planning
Learning Objectives
• Part 1: Introduce concepts,
procedures regarding the analysis of
agri/aquaculture projects
• Part 2: Sources of funding and
tactical objectives
The Project Concept
• All projects suffer from poor
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
Why is Planning Required?
• Waste is a tragic loss to poor
• 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.
What is a Project?
• Definition: the whole complex of activities
using resources to gain benefits
• investment activity: cash, equity, longterm financing
• financial resources are expended
• capital assets are created
• benefits hopefully appreciate over time
Characterizing Aquaculture
• 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
Private Investment (Firms)
• Usually small, minimum size from a financial
technologically, administratively feasible
specific starting point and end point
specific objectives
boundaries and clientele clearly defined
wholly independent administrative
funded through a mix of cash, equity, longterm financing
Project Planning
• Most important factor is to have good
• 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
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
• the typical yardstick might be market price
(actual price at which goods and services are
• 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)
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
often suggested they also look at local assistance
(local development banks); however, criteria are
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
Project Planning Targets
• Large-scale projects target broader
implications than private investment
projects (e.g., social benefit, national
• 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
• both project types must consider scarcity
of investment funds, foreign exchange
rates, labor issues, etc.
The Project Format - Its
• Advances/assesses by organizing info from many
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
encourages checking-out other alternatives
controls reliability of data
format well-suited to production projects w/clearcut investments, valued costs/benefits
Project Preparation and
• 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
The Project Cycle
• Five phases:
• 1) identification (finding the project)
• 2) prep/analysis (Does it have merit?)
• 3) appraisal (critical review,
• 4) implementation (getting it started)
• 5) evaluation (success or failure)
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.
Preparation/Analysis Phase
• This includes all work done to bring the
project to the point of appraisal
first step: feasibility study or business
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
Preparation/Analysis Phase
• Business plans and feasibility studies take
time and money
business plan: about two months
feasibility study: compares projects,
costs are as high as 10% of project value
regained as improved ROI
undertaken by special team of consultants
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
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
implementation needs to be flexible,
though, considering changes in prices and
the greater the uncertainty or novelty of
the project, the more changes will occur
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,
some projects have separate internal units
for this or use outsiders
Are or have objectives being/been met? If
not, were the objectives realistic?
Evaluation Phase
• Was the technology proposed appropriate?
• Were the institutional, management
arrangements suited to the conditions?
Were the financial aspects carefully worked
Were the economic aspects carefully
Did management quickly respond to changes?
Was its response carefully considered and
How could the project’s structure be changed
to make it more flexible?
Accuracy of Project Analysis
• They are supposed to be the basis for
investment decisions; however …
How accurate are they in foretelling future
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
poor financial predictability is the result of
inappropriate technology, poor management,
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
inappropriate technology
inadequate support systems/infrastructure
failure to appreciate social environment
administrative problems
adverse policy environment
Part 2: Sources of Funding
Learning Objectives
• Strategic policy objectives in setting
up projects
Investment strategies
Tactical objectives
Sources of funding
Investment appraisal methods,
Introductory Comments
• Setting up an aquaculture project
typically requires substantial
• financial implications must be
addressed well in advance
• we will look at the likely costs of such
• focus on ideas which are most critical
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
Socio-economic benefits derived from
an aquaculture project
Improved Std.
Of Living
Foreign Exch.
Lowering of Prices
Domestic Market
Supply of
Demand for
Export Market
Increased Foreign
Exchange Reserves
Domestic Market
Stimulation of
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
providing tax “holidays” during implementation phase
permitting repatriation of profits/assets
providing infrastructure (aquaparks)
Investment Strategies
• Private ventures range in size from large,
vertically integrated firms to small backyard
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
Investment Strategies:
• 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
Aquaculture and Farm
• 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
finfish production techniques are simpler
lower value of finfish also keeps it in local markets
Overlap Between Private
Sector and Public Sector
• Allows for cooperation and coordination of
government hatcheries are good example
contract growing schemes (nucleus estate
passing of laws specific to aquaculture
organization of meetings, conferences,
Tactical Development
• 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
Tactical Objective:
• 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
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
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,
grant aid: USAID, UNIDO, WHO, Swiss,
Japanese, Norwegians
developed countries: subsidies and enterprise
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
Funding Sources:
credit institutions
• These sources are typically accessed by
consist of agricultural, fisheries and
cooperative banks with numerous branches
small loans are provided promptly with
minimum bureaucracy
some technical and marketing assistance
briefing to farmers on purpose and use of
credit should also be provided (not often)
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
• venture capital available through specialized
companies (CAIM)
• they expect high rates of return and consider
capital needs of aquaculture firms typically
too small
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
Funding Sources:
public sales
• Accomplished through offering of
• large publicly-traded companies offer
shares for sale, but often not in
reference to only their aquaculture
• aquaculture is considered a
Funding Sources:
joint ventures
• Developing nations have attracted foreign
investment via aquaculture
Why? Land is cheaper, labor cheap, favorable
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
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
• only if technical experts are really
experienced should construction start
• site must achieve recommended criteria
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
Evaluating Joint Venture
• Partners can be cash or in-kind (e.g., land)
• 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)
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