The Infrastructure Project Development Cycle

THE INFRASTRUCTURE PROJECT DEVELOPMENT CYCLE

Renato Reside, Ph.D June 2007

DISCLAIMER

“The views expressed in this report are strictly those of the authors and do not necessarily reflect those of the United States Agency for International Development (USAID) and the Ateneo de Manila University”.

Abstract Getting a good grasp of infrastructure development entails assessing which stakeholders are involved at what point and why. Knowing the project development cycle is necessary to appreciate the role played by different stakeholders in private sector participation in public infrastructure, particularly since PSP adds additional layers to the already complicated system of infrastructure development. This brief details each player and step in the project life cycle, from project identification to ex-post evaluation.

EPRA Policy Brief The Infrastructure Project Development Cycle Infrastructure development encompasses a very broad range of interests, activities and stakeholders. Getting a good grasp of infrastructure entails assessing which stakeholders are involved, at which point in development, and why. Private sector participation (PSP) in infrastructure adds additional layers to the already complicated system of infrastructure development, augmenting the steps involved in public provision of infrastructure. Therefore, a good understanding of the project development cycle will be necessary to further appreciate the role played by different stakeholders in PSP in infrastructure. The project life cycle may be divided into several phases: a) Pre-investment phase Project identification Project preparation Project feasibility study Project approval and financing b) Investment phase Detailed engineering/design Project implementation c) Post-investment phase Project operation Mid-term monitoring Ex-post evaluation

Project Identification Project identification involves surveying different sources to identify demand for infrastructure projects. The sources of project identification include 1) 2) 3) 4) 5)

The Medium Term Public Development Plan People’s representatives, local government units Demand from interest groups or beneficiaries Private sponsors Dialogue between a country and multilateral or bilateral creditors

The basic results from this phase of the project cycle include 1) Determining existing needs or potential deficiencies or existing facilities or activities, and which are consistent with approved development priorities 2) Establishing the concepts that provide strategic guidance to overcome these existing or potential deficiencies 3) Identifying initial technical, environmental and economic considerations of the project 4) Examining alternative ways to accomplish the desired objectives 5) Identifying human and non-human resources to create and support the facilities; and 6) Selecting the initial project design Project preparation Project preparation begins with a description of project objectives, identification of principal issues, and setting up a timetable for the different phases of the project cycle. This stage must cover the full range of technical, institutional, financial and economic issues relevant to achieving project objectives. Government policies that could influence the project’s outcome may need to be examined. The project’s technical and institutional alternatives may also need to be critically assessed. An appropriate technical package must be chosen in implementing the project, and an appropriate agency or unit that will manage the project. The basic results from this phase 1) 2) 3) 4)

Preparation of detailed plans required to support the facility Indication of the possible technical packages to be considered More realistic assessment of costs, time schedule and operational requirements Identification of areas where high risk and uncertainty exists, and further exploration of these areas 5) Firm identification of human and other resources for the project 6) Determination of the necessary support systems 7) Identification and initial preparation of documents required to support the project such as procedures, job descriptions, budget and funding papers Feasibility Phase In this phase, the project’s overall potential viability is examined using data and information gathered at the preparation stage. A lack of proper project planning that flows from a poor feasibility study has been found to be a major contributor to the failure of projects. A good feasibility study contains the following modules: 1) Demand and supply or market module

This module examines demand for the goods and services of a project in the domestic or foreign market and the supply condition expected to prevail during the project’s life. 2) Technical or engineering module This module is concerned with a project’s input parameters, quantities and prices of inputs by type required for project construction, inputs required for the project’s operation by year, and the propriety of the technology adopted. It is also concerned with issues such as project size, design and location, and the technology to be adopted including equipment and processes to be used. Assessment of the environmental impact caused by inputs, outputs or technology should be a central component of this module. 3) Manpower and administrative support module This module reconciles the project’s technical and administrative requirements with the supply constraints on manpower. Whether future financial and economic benefits materialize depend on whether there is sufficient administrative capability within an agency in charge to put the project in place. 4) Financial module This module provides the first integration of financial and technical variables estimated in the marketing, technical and manpower modules. A cashflow profile of the project is constructed, which identifies all receipts and expenditures expected to occur during a project’s lifetime. 5) Economic module Economic appraisal examines the project from the entire economy’s point of view to determine whether or not its implementation will improve the economic welfare of the country or the region. Benefits and costs are measured using techniques to determine the economic prices of goods and services, foreign exchange and the cost of capital and labor. True economic values of costs and benefits are not reflected in market prices in the presence of various distortions such as trade restrictions, price control, taxes, subsidies and minimum wages. 6) Social module This module deals with the identification and quantification of the project’s impacts on its stakeholders, including the well-being of particular groups in society. 7) Institutional module This module addresses the following issues:

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Is the entity supposed to manage the project properly organized and its management equipped to handle the project?

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Are local capabilities and facilities being properly utilized?

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Are changes needed in the policy and institutional setup outside this local entity?

8) Environmental module This module should address the following issues: -

What impact will the project have on the environment?

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What equipment or facilities will be required to reduce or eliminate the pollution from the project and what will be their cost?

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What will be the cost of providing remedies to the adverse impact created by the project?

Project approval and financing negotiations After all modules in the feasibility phase have been completed, the project must be examined to see if it can meet the financial, economic and social criteria set by the government (e.g., the NEDA ICC) for investment expenditures. This is the final part of project appraisal and is meant to improve the accuracy of the measures of key variables if the project shows potential for success. More primary research will have to be undertaken and perhaps a second opinion sought on other variables. Since estimates of costs and benefits may be subject to error, the sensitivity of the project’s outcome to variations in the values of key variables must be analyzed. Cost estimates should at this point be very accurate and the sources and nature of financing identified. Identification of financing at this stage will ensure that the project can proceed to the next phase. Also, the implication on the project costing of each type of financing will be established. At the end of this stage, the decision to approve or disapprove a project must be made. If the feasibility study convinces decision-makers to approve a project, the next major steps are tying up the financing and developing a detailed project design. Investment Phase Detailed design

In this point in the project cycle, preliminary design criteria must be established when the project is identified and appraised, but expenditures on detailed technical specifications are usually not warranted at this time. Once the project has been approved for implementation, the design task should be completed in more detail. Details of the basic programs should be provided, tasks allocated, resources to be determined and functions to be carried out along with their priorities set down in operational form. Technical requirements, such as manpower needs by skill class, should also be completed at this stage. After the blueprints and specifications for construction of facilities and equipment are completed, operating plans and schedules along with contingency plans must be prepared and brought together. When this process is completed, the project is again reviewed against the criteria for approval and implementation. If it is unable to meet the criteria, the result must be passed onto the appropriate authorities for final disapproval or acceptance. Project Implementation This stage covers both the completion of construction activities and the subsequent operations. Implementation is generally divided into three time periods: an investment period when the major investments are made; a development period when production capacity is gradually built up; and the period of full implementation. Resources are allocated and coordinated to make the project operational. Proper planning at this stage is essential to prevent undue delays and administrative procedures have to be designed for the smooth coordination of the activities required in project implementation. All projects face implementation problems, usually due to planning flaws or changes in the economic and political environment. Thus, monitoring and supervision systems have to be evolved to ensure that implementation is completed successfully and on time. Post-Investment Phase Project Operation A project reaches the operation stage after investments have been made. It is when the expected project benefits start to be generated. As soon as the project is operational, it is essential that the skills, plans and controlling organization be available to carry on with the function of the project in order to avoid excessive start-up costs. Mid-Term and Ex-Post Project Evaluation For the development of the operational techniques of project appraisal and improvement in the accuracy of evaluations, it is useful to compare the projects predicted with its actual performance. In an ex-post evaluation, elements of success or failure are analyzed. A project evaluation is a must before any follow-up project is planned. A final detailed ex post evaluation must be undertaken once the project is terminated.

To facilitate this type of evaluation, the administrative aspects of project development must be reviewed as soon as the project becomes operational. An audit should be conducted immediately after the construction phase and a completion report submitted. The project’s outcome (net present value or internal rate of return) should be re-estimated based on actual investment costs and updated costs of maintenance and operations. More extensive than the audit is the ex post evaluation, where the project’s performance and overall contribution to development is assessed. Such an evaluation also identifies the critical variables in the project’s design and implementation that may have determined its success or failure. From such an evaluation should emerge well-considered recommendations about improving each aspect of the project design and actual implementation. Based on this evaluation, ongoing projects may be modified and subsequent projects in the sector can be improved. Evaluation may be performed by different parties directly or indirectly involved with the project.

Components of the Project Cycle Concept or Identification Implementing agencies (IAs) identify project to implement from various sources.

Project implementation IAs implement, operate and evaluate progress of project.

Ex-post evaluation IAs 1. Re-estimate project's outcomes based an actual performance. 2. Identify critical variations from plan.

Definition or preparation Implementing agencies: 1. Review existing policies and procedures that can affect project. 2. Examine technical and institutional alternatives. 3. Assess costs, time schedules and operational requirements

Detailed design Implementing agencies: 1. Detail basic programs. 2. Allocate tasks, 3. Determine resources. 4. Complete blue prints and specifications.

Future projects

Feasibility phase IAs prepare various modules of the feasibility study. Determine if project is worthwhile to implement.

Approval and financing Approving body 1. defines project parameters; 2. check accuracy of information and parameters; 3. Decide on approval or rejection of project. Implementing Agencies 4. present project for 'yes'/'no' decision 5. arrange financing in case of 'yes' decision.