Design, Analysis, and Implementation of Development Projects: Guides for Bankers, Investors, Sponsors, and Implementors

By Alberto D. Pena

The book offers important guidelines in analyzing the technical, economic, financial, administrative and organizational, environmental, commercial, and institutional aspects of development projects. It also suggests a format for organizing these aspects into one comprehensive design as it emphasizes the need for analyzing investments in their entirety as opposed to analyzing them in separate segments.
Managers and technicians from national and local governments, business corporations, parastatals or public enterprises, non-governmental organizations, development and commercial banks, and national and international aid funding institutions who are directly or indirectly involved in planning and implementing development activities will find this book useful.
Teachers and students in project management, finance, banking, economic analysis, and development management will also find valuable learning gains from the book. The concepts and procedure in designing and analyzing development projects are illustrated using hypothetical case studies. The discussions and illustrations will serve as important guidelines in the implementation of development projects.

• Language: English
• Publisher: AuthorHouse
• Release date: Jul 8, 2016
• ISBN: 9781524608194

Alberto D. Pena

Dr. Alberto D. Pena has a Ph.D in Political Science and one of his principal interests is Development Administration. He is a Principal Consultant in Development Finance in the Institute of Development Finance (IDF), the education and research unit of the Association of Development Financing Institutions in Asia Pacific (ADFIAP). He was an Associate Professor (Retired) at the University of Connecticut (USA) and served as Associate Director (Retired) at the Office of International Studies and Programs (OISP) at Illinois State University (USA) In-Charge of Management Development International (MDI). Dr. Pena developed a number of manuals and guides in development banking focusing mainly on development finance. He has conducted a number of seminars on this subject including the design and analysis of development projects. He is a principal instructor on development finance at the Institute of Development Finance (IDF) and instructor at the Management Development International (MDI) on the same subject.

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© 2016 Alberto D. Pena. All rights reserved.

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Published by AuthorHouse 08/05/2016

ISBN: 978-1-5246-0820-0 (sc)

ISBN: 978-1-5246-0819-4 (e)

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ORGANIZATION OF THE BOOK

INTRODUCTION

CHAPTER 1 THE CONCEPT OF DEVELOPMENT AND THE NATURE OF DEVELOPMENT PROJECTS

Concept of a Project; Definition of a Program; Characteristics of a Development Project; The Missing Ingredients; Levels of Economic Development; Direction of Development; Development Projects and Socio-Economic Condition; Social Overhead Capital (SOC) and Direct Productive Activities (DPA); Government as Investor; Understanding National Strategies; The Socio-Economic Profile (SEP).

CHAPTER 2 CONCEPTS AND FORMATS IN PROJECT DESIGN AND ANALYSIS

Investment in Projects; The Project Cycle: Pre-Feasibility Study, Feasibility Study, Gestation Period, Utility Period, and Final Evaluation Period; The Application of the Project Cycle; The Logframe: Concepts of a Logframe, Format of a Logframe, and Illustration of a Logframe; The Concept of Project Boundaries: The Action Boundary and Time Boundary; The Concept of Opportunity Cost; Categories of Nominal Cost; Problems of Double Counting; The Project’s Budget; The Concept of Externalities; The Context of Project Design and Analysis in Project Management; Aspects of a Project Design; Overview of the Procedure for Project Design and Analysis

CHAPTER 3 TECHNICAL ASPECT AND THE TECHNICAL FEASIBILITY OF PROJECTS

This Chapter consists of two sections. Section A focuses on the design and analysis of the technical aspect and Section B discusses the process and financing of technology transfers.

Technical Feasibility; The Background of the Project Idea; The Need for Technical Persons and the Required Expertise; The Role of Technical Consultants and Technical Consulting Firms; Technical Deliverables and Scope of the Project; Determining Economic Life; Implementation Activities and Resource Requirement; Developing Implementation Time Table; Determining the Level of Operation and Maintenance Costs; Determining Project Location and Influence Area of the Project

Technology Transfer and Economic Development; The Concept of Technology and Appropriate Technology; Actors in Technology Transfers; Objectives and Concerns in Technology Transfers; Technology Development and the Product Life Cycle; International Product Life Cycle; Dimensions of Technology Transfers; Kinds of Technology Transfers; Negotiating Positions in Technology Transfers; Pricing of Technology; Technology Transfer Mechanisms; Financing Schemes; The Role of Development Banks and Other Development Financing Institutions in Technology Transfers

CHAPTER 4 ECONOMIC ASPECT AND THE ECONOMIC FEASIBILITY OF PROJECTS

The Economic Aspect and the Economic Analysis of Projects; Private Investment in Development Projects; Points of View in Project Design and Analysis; Private Investment in Development Projects; Demand Analysis; The Nature of Public Enterprise; Application of the Points of View in Specific Items in Economic Analysis; Government Subsidy; Transfer Payments; The Concept of Economic Cost; The Concept of Opportunity Cost; The Concept of Benefit; Financial Benefit and Economic Benefit; Economic Benefit and the Missing Ingredients for Development; Employment Generation as Economic Benefit; Consumer Surplus as Economic Benefit; Estimating Economic Benefits; Incremental Production as Economic Benefit; Savings in Cost as Economic Benefit; Pitfalls and Inaccuracies in the Estimation of Economic Benefits; Valuation of Economic Benefits; With and Without Method of Estimating Economic Benefit; Enumeration of Economic Benefits; Major Variables for Determining Economic Feasibility; Measures of Economic Feasibility: NPV, BCR, IRR; Externalities; The Concept of Shadow Pricing; Identification of Project Beneficiaries

CHAPTER 5 FINANCIAL ASPECT AND THE FINANCIAL FEASIBILITY OF PROJECTS

Section A: Financial Aspect and the Financial Feasibility of Project; Financing of the Project: Equity Financing; Loan Financing; Grant Financing; Other Forms of Project Financing.

Section B: Budgeting and Accounting for Projects: The Budget Format; Project Budgets; Implementation Budget; The Operation Budget; Proforma Accounting Documents: Definition and the Process of Accounting, Financial Accounting, Proforma Income Statement, Proforma Balance Sheet, and Proforma Cash Flow.

Section C: Credit Analysis: The Nature of Credit; Start of Credit Investigation; Areas of Credit Analysis for Investment Loans; Cash Flow Analysis; Income Statement; Balance Sheet; Management of the Firm; Firm’s Position in the Industry and the Future of the Industry Itself ; Investment Climate in the Country Where the Firm Operates; International Conditions Affecting the Firm and the Industry; Loan Security; Asset-Based Collateral Approach; Other Asset Collateral Approach; Performance – Based Approach; Identifying Business Risks; Guidelines for Credit Analysis for Investment Loans; Guidelines for Credit Analysis for Specific Type of Loans: New Commercial Investment Project, For Existing Company, For Development Loan, For Development Projects without Commercial Aspect, and For Development Project with Commercial Aspect; Use of Financial Ratios for Credit Analysis.

Section D: Concept and Functions of the Treasury and Risk Management: Financing the Operation of Development Projects; The Concept and Function of the Treasury; The Exercise of Treasury Functions; Cash Management; Financing Operating Costs and Working Capital; Parking the Money; The Use of Cash Flow Analysis in the Treasury; Sinking Fund and Cash Flow Analysis; The Treasury and the Bank; Risk Management; Use of Derivatives for Managing Risks.

CHAPTER 6 COMMERCIAL ASPECT AND THE COMMERCIAL FEASIBILITY OF PROJECTS

Attributes of the Commercial Aspect; Establishment of Public Enterprises; Commercialization as a Target of Development; Financing Development Projects intended for Commercial Operation; Private Investment in Development Projects; Foreign Direct Investment (FDI); Subsidized Commercialization; Commercialization and Competition; Determining the Commercial Potential; The Issue of Export Promotion and Import Substitution; Commercialization of Public Utilities; Commercial Demand; The Concept of User’s Fee and the Commercial Aspect; The Concept of Bankability and the Commercial Aspect; The Commercialization of Social Overhead Capital (SOC); Test for Commercial Aspect

CHAPTER 7 THE ANALYSIS OF THE ADMINISTRATIVE AND ORGANIZATIONAL ASPECT

The Requirements of the Administrative and Organizational Aspect; Overview of Project Management; Nature of Project Management; Project Organization: Organizational Chart; Organizational Structure and Behavior; Qualification of Project Management Personnel; Managing the Implementation Segment: Managing the Contractors; Managing the Operation of the Project; Important Roles of a Project Manager: Information Gatherer; Decision Maker; Coordinator; As Advocate of the Project; As a Liaison; A Leader; Processes in Project Management: The Flow of Communication; Command Responsibility; Area of Discretion; Span of Control; Marketing for Projects: Social Marketing; Commercial Marketing; Procurement: Procurements for Materials and Equipment; Procurement of Personnel Services; Administrative and Legal Requirements: Importance of Paperwork; Projects Created by Special Laws; Summary.

CHAPTER 8 DESIGN AND ANALYSIS OF ENVIRONMENTAL ASPECT FOR DEVELOPMENT PROJECTS

The Nature of Environmental Aspect; The Issue of Environmental Protection and Management; Environmental Blunders; Not in My Backyard; Points of View in the Design of Development Projects (Revisited); What is a Pristine Environment?; The Impact of Environmental Aspect on the other Aspects of Project Design; Green Banking; Introduction of New Species; Endangered Species; Internalizing the Externalities; Short Term Solution Creating Long-term Problems; Cultural Pollution; The Impact of the Environment on the Project; Regulatory Agencies for Environmental Protection and Management; Environmental Impact Analysis; Monitoring Environmental Impact; Summary.

CHAPTER 9 THE ANALYSIS OF THE INSTITUTIONAL ASPECT OF PROJECT DESIGN

The Focus of the Institutional Aspect; The Concept of Institution; Institution Building; Requirements of the Institutional Aspect; Modernization and Institution Building; Social Impact Analysis; The Need to Institutionalize the Project; The Concept of Stakeholder; Stakeholder Analysis; Marketing the Project; The Concept of Community Development; Community- Based Implementation Strategy (CBIS); Institution Building as a Project; Summary.

CHAPTER 10 COST EFFECTIVENESS ANALYSIS: CONCEPT AND PROCEDURE

Section A: The Nature of Cost Effectiveness Analysis

Importance of Cost Effectiveness Analysis; The Concept of Cost Effectiveness; Assumptions in Cost Effectiveness Analysis; Two Definitions of Cost Effectiveness Analysis; Categories of Alternatives; Decision Rules in Cost Effectiveness Analysis; Computation for Lesser Cost Method (LCM) and Benefit Cost Ratio (BCR); How to Account for Relevant Costs; Watch Out for Double Counting; The Concept of Discounting; The Concept of Opportunity Cost (Revisited); The Concept of Benefits; Boundaries of Investment; Project Budget; Externalities; Decision – Making Formats where CEA is Useful.

Section B: Cost-Effectiveness Analysis Procedure

Clearly Define the Objective/s of the Project; Enumeration of Possible Alternatives; Determine the Resource Requirement for Each Possible Alternative; Determine Relevant Constraints; Determine Feasible Alternatives; Determine and Compute the Appropriate Evaluation Criterion; Rank the Feasible Alternatives Based on the Evaluation Criterion; Evaluate the Externalities; Make Recommendation.

C: Illustration of the CEA Procedure using a Hypothetical Case Study

CHAPTER 11 THE ROLE OF BANKS IN FINANCING DEVELOPMENT PROJECTS

Development Financing; Concept of Development Banking; Objectives of Development Banks; Recent Evolution of Development Banks; Roles of Development Banks; Development Banking and Stages of Economic Development; The Concept of Balance Growth (or Rather Unbalanced Growth); The Concept of Opportunity Cost and its Application to Development Bank Operation; Cost of Capital for Development Banks; The Rate of Bankability; Functions and Performance Standards for Development Banks; Concepts and Methods for Evaluating the Performance of Development Financing Institutions including Development Banks; Investment Guidelines for Development Banks; Summary.

CHAPTER 12 MONITORING AND CONTROL: CONCEPTS AND PROCEDURE

Section A: Concepts and Procedure of Monitoring and Control.

Monitoring and Control Model; Monitoring and Control in Project Implementation; Monitoring and Control as Management Tools; What is being Monitored and Controlled?; Who Monitors and Who Controls?; Monitoring and Control as a System; Applications of Management Information System (MIS); Application of MIS in Organizational Management; Application of MIS in Project Implementation; How to Develop a Management Information System; Illustration of a Monitoring and Control System; Concepts and Procedure for Developing a PERT/CPM Network; Computerized Management Information System.

Section B: Forecasting as an Element of Monitoring and Control.

Forecasting as an Important Element in Monitoring and Control; The Concept of Forecasting; The Process of Forecasting; Forecasting Methods; Examples of Forecasting in Financial Management; Forecast of Future Financial Conditions; Sensitivity Analysis; Summary.

APPENDIX 1 CALENDOLA FERTILIZER PROJECT

The illustrations and examples for the different aspects of the project design and analysis will be based on this hypothetical case study. Hypothetical case studies are good for understanding the concepts and requirements of a procedural model since it can be focused entirely on concepts being discussed.

APPENDIX 2 TOMATO PROCESSING PROJECT

This case study is an illustration for designing and analyzing development projects with private sector investment. Its financing support is included in the SME program of the government. It will avail of loan from the government-owned development bank as well as loans from commercial banks. This is an illustration of a development project that requires analysis in both public and private point of view. This is an example of how development banks could involve commercial banks in financing development projects.

APPENDIX 3 TABLE OF INVESTMENT MULTIPLIERS

REFERENCES

PROLOGUE

DESIGN, ANALYSIS, AND IMPLEMENTATION OF DEVELOPMENT PROJECTS

By: Alberto D. Pena, Ph.D.

Associate Professor, University of Connecticut, Ret.

This book will serve as important guide for bankers, investors, and implementors. Some portions of this book were derived from the Manual on Financial Management System by the same author. Any portion of this book should not be printed without the written permission from the Author.

INTRODUCTION

Good project management starts with systematic design and analysis of investment proposals. In addition to ensuring successful implementation, thorough analysis and proper designing of projects reduces mistakes and uncertainties in the allocation of valuable resources.

Projects can be viewed as private or public. Private projects are designed for the purpose of realizing financial profits for private investors. Public projects are targeted to achieve specific socio-economic objectives and are designed to benefit the whole society or certain groups of people. This distinction becomes blurry however when private investors are required to get government permits and follows government guidelines on investments. In this case, while private investors are pursuing their profit motives, the government is ensuring that the venture will contribute to socio-economic development.

The government also gives incentives to entice private investors to invest in government-sponsored projects. There are also cases when the government takes the initiative of providing funds to private persons or groups to make private investments in targeted development areas. Instead of dwelling into this complex distinction, this book will consider all investments that are targeted to provide socio-economic gains for specific groups of beneficiaries and their communities as public projects, otherwise known as development projects. These projects are either funded directly by national and local government, by domestic or international sponsors, or by corporations or groups following certain development guidelines. There are many development projects that utilize a combination of private and public sources of financing. This book is specifically written for these types of projects.

The book offers important guidelines in analyzing the technical, economic, financial, administrative and organizational, environmental, commercial, and institutional aspects of development projects. It also suggests a format for organizing these aspects into one comprehensive design as it emphasizes the need for analyzing investments in their entirety as opposed to analyzing them in separate segments.

The technical, economic, financial, administrative and organizational, and environmental are required for the design and feasibility study for all projects. The commercial aspect is necessary for all revenue projects with commercial potential in addition to the five aspects mentioned above. The institutional aspect is needed for social projects also in addition to the five aspects mentioned above.

Managers and technicians from national and local governments, business corporations, parastatals or public enterprises, non-governmental organizations, development and commercial banks, and national and international aid funding institutions who are directly or indirectly involved in planning and implementing development activities will find this book useful. Teachers and students in project management, finance, banking, economic analysis, and development management will also find valuable learning gains from the book.

A project is not feasible if it does not meet the criteria for any one of the aspects mentioned above. In other words, a project is not feasible if the required technology, manpower, equipment, materials, and organizations are not available. A project is also not feasible if it is not within the financial and economic capability of investors. In addition to these requirements, many sponsors of development projects need assurances from designers that the benefits will be received by target beneficiaries, the project will not impact negatively on the environment, and the required institutions are developed. The book ensures that these requirements are given adequate attention.

The book is specifically tailored for designing and analyzing development projects, although with minor modifications, the design and analytical model presented can be used in designing and analyzing purely private oriented projects. The model is applicable to a wide variety of investments in agriculture and agri-business, industrial production, transportation, communication, energy supply, education, health, and other socio-economic development projects.

Managers from development banks, commercial banks, and other development financing institutions can benefit greatly from this book. Likewise, foreign and domestic corporate investors, government officials, and managers from international and local development agencies, and development advocates from non-governmental organizations will find this book very relevant. At the minimum, it will remind them that development financing is normally long-term and risky and should be designed and analyzed carefully. It will also remind them that development projects could bring significant socio-economic changes if adequate guidelines and safeguards are followed in the designing process.

Technicians from engineering firms that develop technical project specifications (technical aspect) should also be knowledgeable on the other aspects of the whole project in order to have a comprehensive view of its feasibility and sustainability. Teachers and students in public administration, business administration, engineering, economics, banking, development finance, who are engaged in the study of development administration, investments, project management, financial management, and economic analysis, will also find this book a good reference.

CHAPTER 1

THE CONCEPT OF DEVELOPMENT AND THE NATURE OF DEVELOPMENT PROJECTS

Concept of a Project; Definition of a Program; Characteristics of a Development Project; The Missing Ingredients; Levels of Economic Development; Direction of Development; Development Projects and Socio-Economic Condition; Social Overhead Capital (SOC) and Direct Productive Activities (DPA); Government as Investor; Understanding National Strategies; The Socio-Economic Profile (SEP).

Concept of a Project:

A project is a set of related activities being planned separately to achieve specific objectives. It normally requires an initial investment in anticipation of future benefits.

Strictly speaking, any proposal for investment is a project. However, the term normally applies to a set of activities requiring a fairly large amount of investment in relation to the capability of its investors. An electrification project or a construction of a communication grid at the national level might involve very significant amount of investment. A light rail transit system that will connect different transport nodules in a city requires large investment in building the rails, purchasing or constructing the trains, building transfer terminals and providing the other components of the project. These are projects at the national level.

At the provincial level, investments in various projects may average to hundred thousands of dollars, which is fairly large in relation to the financial capability of the provincial government. Smaller projects at the municipal level may require smaller amounts but nonetheless taking a big bite out of the small town budget. Community development projects in small villages may involve just a few thousand dollars but nevertheless a big undertaking for the people.

In some cases various projects in provincial, municipal, and village levels are merely parts of a bigger project at the national level. At that level, the collection of these projects is analyzed and designed as one project or program.

In business corporations, the proposal to establish a manufacturing plant that requires a significant injection of capital is a project. Such project could be financed by a single large foreign corporation or by a joint venture with local companies. A food-processing project may be a project for a medium size corporation. A farmer’s cooperative or small-scale entrepreneur can undertake a small fruit-canning project.

A major highway that will connect a city to different outlying areas requires large investment in building the roadway, crossroad bridges, toll fee terminals and providing the other components of the project. These projects at the national level could be financed by a combination of government and private funding.

There are many types of projects. The most commonly known projects are in agriculture, industry, public works, transportation, energy supply, and communication. Other types include projects in education and health care involving a combination of infrastructures and social services. There are projects promoting culture and tourism such as museum, resort, development of historical and culture sites, and production of native products for souvenirs. There are projects for the improvement of management and personnel skills including training projects and development of improved administrative systems. There are development projects for small and medium enterprises (SMEs). All these projects utilize a combination of infrastructure, services, technology, and processes.

The infusion of significant resources to a set of activities is a historical perspective of projects. The first notion of a project is that it is big and complex. Examples include construction of large dams, network of highways, large airports, construction of new airplanes, building of large manufacturing plants, construction of a modern communication grid, and similar mega-size undertakings. Through the years, the process and techniques learned from this ultra-projects were used by different organizations, private and public, big and small. Under this notion, a project can be defined as any undertaking requiring a significant amount of resources in relation to the capability of the investing organization. A small investment is not a project to a large corporation or the government of a rich nation, but such small investment could be big for a medium size business corporation or to the government of a poor nation.

Jack Meredith and Samuel Mantel give a better guide to the definition of a project.¹ According to these authors, a project is a specific, finite task to be accomplished and whether it is large or small or whether it is long or short run is not particularly relevant and every project has some elements that are unique and by nature cannot be reduced to routine. According to J. Davidson Frame², projects are goal oriented and involve interrelated activities. These definitions indicate very important characteristics of a project: goal orientation, interrelated activities, time boundary, and of being unique.

The project definition advanced by these authors supports the definition of projects mentioned previously. Although expressed in different angles, all definitions of a project involves a set of activities being planned separately, having its own identity when it comes to allocation of resources (financial and human), it is designed to achieve a particular purpose, and has a life cycle. Implied in these definitions is the commitment of a significant amount of resources in relation to the capability of the organization.

Goal orientation and goal setting is not unique to a project. Even organizational management has its own goals and objectives. The main difference lies on the specificity of the goals and the time duration for achieving such goals. Projects goals are very specific and the time duration for its achievement is clearly indicated.

An important characteristic of a project is time duration. Projects have definite period of existence compared to an organization which could exist indefinitely. This time period is known as the economic life of the project. In addition project activities are sequenced in such a way as to implement the project in shortest possible time considering relevant constraints. Deadlines are more real in projects. Meeting deadlines also means budget containment. In projects time is always related to cost.

The notion of uniqueness and novelty is always an identifying mark of a project. It implies that the project has its own identity. It has its own budget and its own management team. It also implies innovation and improvement. It emphasizes the non-routine nature of project implementation as compared to routine and day-to-day organizational activities.

The life of projects goes in cycle. There is the time of conception, birth, definite time period for existence, and termination. The experiences accumulated during this lifetime will serve as lessons for new projects. Similar management cycle is also evident in organizational management. However such cycle is more of a renewal rather than a birth of new ideas.

Projects have their own financial management system. In an organization, the financial management is manifested in a system of planning, budgeting, accounting, and auditing. This financial system is normally reckoned in a one-year period known as the accounting year. The accounting year is either a calendar or fiscal year, both consisting of 12 months. The renewal of the financial system is routine for all organizations.

The project financial management system also consists of planning, budgeting, accounting, and auditing. However there are subtle differences between the financial management system of organizations and financial management system of projects. Although the mother agency or sponsors may require a project to make financial reports within their own accounting year the financial system for a project is stretched throughout the lifetime of the project. The financial reporting in projects is unique to the project and characterized by much closer monitoring and control.

What is not readily discernible in the definition of projects is the concept of risk. But risk is a reality in projects. It is similar to an invisible force lurking behind the dark alleys of project implementation. The novelty of the project, application of new ideas, and development of new systems brings the project into the unknown territories. The only perceptible guidelines of new projects are the experiences of dead projects. But the dead projects, however similar to the new project, are simply different.

Definition of a Program:

A program is a set of interrelated projects. In this context, the notion of a project being planned separately appears to be at odds with the definition of a program. It is not. The definition of a program is focused more in the interrelationship between projects in terms of scheduling and integration of their purposes. It means that a project in a program can only be scheduled to begin at a certain point of implementation of another and its particular purpose should support the overall program objectives. An example is a rural development program consisting of three projects, namely rural road project, rural electric distribution project, and the development of a cottage industry project. Each project will have its own budget allocation and implementation team. Each will have its own purposes and life cycle. In a program management however, the scheduling of these projects should be synchronized and the purpose of each project should contribute to the overall purpose of the program. Obviously, the purpose of the whole program is to increase rural income.

Technically speaking, each project in the above program can be planned and implemented separately since they have their own definite purpose. In our example, the rural road project is synchronized with the implementation of the rural electrification project for two important reasons; 1) The rural road project will support the electrification project for easy access and maintenance, and 2) Both projects will serve a common target beneficiary. The target beneficiary of these projects is the rural population that would be involved in the production and processing of agricultural products and other cottage industries.

In purely academic sense, the rural road project serves a different purpose of providing farm to market outlet while the electrification project provides energy for agricultural processing and other small scale industries. In other words, both projects could be implemented separately in different areas according to the immediate development needs. In a sense, the electric distribution system project could be implemented without the construction of rural roads. On the other hand, the development of rural industry project does not depend entirely on the availability of electric power. However, the program planners thought that the combination of these projects is a better way to increase rural income. It is obvious that the design concept for this particular rural development program is as follows: The rural road would induce additional agricultural production and with the available supply of electricity, the surplus agricultural production could induce the development of cottage and small-scale industry. In addition, the rural electrification needs the rural road as part of electricity distribution infrastructure.

Private corporations embark on large projects. These projects are so large that they are divided into sub-projects. An example is the manufacturing and assembly of a new agricultural machine. The corporation will assign the development and manufacture of various parts to different departments or subsidiaries until the new engine is finally assembled and ready for testing. The corporation may even sub-contract some of the parts to outside manufacturers. The manufacturing of the different parts that are assigned to different outfits are called sub-projects. Each sub-project has its own management team and budget. These sub-projects are arranged in such a way as to synchronize their movement into the finished project. The outputs of each sub-project are inputs to others. The arrangement of the sub-projects can be construed as a program but with one notable caveat. The product of each sub-project cannot be sold independently and serve no purpose except as parts to the intended machine. In a program, each project can serve a particular purpose and produce a finish product. These projects are just assembled in a program in order to achieve a bigger purpose.

Program management, as illustrated above, focuses the different project objectives into one comprehensive purpose, thus avoiding the conflict situation inherent in project management.

Characteristics of a Development Project:

A development project can be defined as a set of related activities requiring a fairly large capital investment and is being planned separately for the purpose of achieving specific socio-economic objectives.

Investments on development projects usually come from sponsors such as government, international aid agencies, development financing institutions, and non-government non-profit organizations commonly known as NGOs. These organizations are interested in improving the socio-economic well-being of targeted beneficiaries. They are loosely categorized as public sector organizations. In the definition of development project above however, the sources of funding is not a major characteristic of a development project. There are many examples of development projects financed by private funds. Private corporations invest in development projects because they find it profitable. Many private investors put their money into development projects because of government incentive and guarantee. Private sector organizations also find it worthwhile to participate in development activities since socio-economic development will ultimately result to financial profit.

A case in point is the role of development financing institutions. The term applies to organizations and agencies created to finance development projects. Some are engaged in a broad range of development activities but some are engaged in special development areas such as agriculture, industry, small and medium enterprises (SMEs), tourism, health, education, and other socio-economic endeavors. Development financing institutions are classified into two groups, namely: development banks and non-bank development financing institutions.

Development banks are mandated by their owners to recoup their investments and maintain their pool of capital. They are to operate just like any other bank but with one important distinction: they are in the business of development. Whatever such business is it should be profitable to the owners of the bank. Not all development banks are owned by government. Some are privately owned. Regardless of ownership, the minimum requirement for development banks is to revolve their capital without impairment. The concept of development banking erases the common notion that development financing is a giveaway.

Non-bank development institutions were created by government and other public organizations to engage in development projects. Unlike development banks that serve as intermediaries between savers and investors, the non-bank development financing institutions are engaged only in one end of the financial intermediation. They do not accept deposits. Their sponsors provide them with a pool of capital for investment in development projects. That is the reason why some non-bank development financing institutions are called financial facilities. An example is a foreign exchange facility. These institutions help importers and exporters obtain foreign exchange. An agricultural lending facility established at the Ministry of Agriculture is another example. An insurance or pension corporation would establish a lending facility for selected industry as a means of investing the premiums collected from their members.

These facilities are mandated by their sponsors to replenish their capital. Some are expected to earn profit as in the case of investments from insurance and pension corporations. On the minimum, they are required to finance their operating expenses. This is mostly true in case of government funding facilities. This concept of financing implies that investment in development projects is not a one way process. It should bring benefits to investors and target beneficiaries.

The definition of a development project presented in this book is consistent with the definition of a project discussed above with one notable exception: That the project is being planned for the purpose of achieving specific socio-economic objectives. This definition connotes the publicness of development projects. It does not mean however, that development projects are being planned and implemented solely by public entities and it benefits only the public sector. As mentioned previously the private sector is a very significant investor in development projects and it is but logical to assume that the private sector would seek to satisfy its own objectives. However development projects follow certain development policies and guidelines of the government and the overriding issue is the project’s contribution to development. In most cases, the government takes the initiative of inducing private investments in particular development sectors of the economy, or in a particular geographical area.

A development project is socio-economic in nature. It seeks to satisfy, or in many cases reconcile the social, political, and economic aspirations of a developing country. It is very naive to assume that projects that are good on the point of view of a private corporation are also good for the country. Development projects are also political because they serve a particular segment of population.

The common perception about development projects is that the investment is from a public entity. It is the publicness of its socio-economic objectives that feeds this myth. This distinction becomes blurry however when private corporations invest in development projects. As a matter of fact, the private sector has a large stake in the implementation of these projects. Private corporations are in the forefront of investing in many development projects in transportation, communication, food processing, and other industrial projects that are considered priorities in a country’s development plan. The distinction is based on whether the project is a priority of the government and not on the way it is financed.

The first clue in classifying a project as a development project is the project’s identification with the development plan. Developing countries make their development plans, normally, on a five-year rolling cycle. In a five-year cycle, development objectives are targeted for five years but the plan is being reviewed and at times revised every year. The development plans set priorities, which serve as a guideline for identifying specific development projects. Some development plans would even list specific projects that require very significant amount of investment.

An investment considered a development project in one country may not be considered as such in another country. The classification depends mainly on two factors: 1) being a priority of the government as enunciated in the development plan and 2) level of development. These two factors are almost a subset of each other but I separated them into distinct category for emphasis. The first factor is self-explanatory since there is a definite guideline: the development plan. The other is a little bit blurry since levels of development do not have clear cut boundaries. Countries are just categorized into less developed countries, developing countries, and more developed countries. Even in this broad categorization however, a classification for development projects can still be determined. The guide is whether the investment belongs to an industry that is already commercialized. The term commercialized implies that there is an existing commercial supply and demand for the product and that the private sector is already involved. For example, if food processing has already a commercialized production facility and is meeting a commercialized demand in a country, such industry is attractive for the private sector to invest or continue investing. If such industry is not yet commercialized in another country and the government considers it as an opportunity for development, it will become a target of development financing.

Being commercialized or non-commercialized depends on a number of factors. These factors include lack of capital, lack of technology, and undeveloped market. These factors mainly impact on the private sector’s ability to invest. Development financing for this sector will involve injection of capital, introduction of technology, and development of market outlets, both domestic and abroad. In addition, due to a high level of risk in an untried venture, development financing may even involve subsidy to reduce risk on the part of the private sector.

In developing countries, investment in development projects is a very volatile and sensitive issue because of competing demands from various political constituencies. The poor segment of the population tends to favor projects that will serve their immediate needs and would distribute income more equitably. Projects in health, education, micro-business, basic agriculture and other social development projects belong to this general category. The middle income class and upper income class segments of the population tends to favor investments in commercial and industrial development as well as investments in communication, energy supply, transportation, food processing and agribusiness, and other projects that directly contribute to industrial production. By design, the first category is normally non-revenue or less-revenue producing while the latter is geared towards earning maximum profit.

Likewise, population in different geographical regions would complain that their area is economically depressed because the government concentrates investments in the more affluent cities and provinces. This quandary puts the government on the spot and project planners appear to get lost in the political maneuvering. The concept of trickle down or trickle up in economic strategy becomes very real in designing development projects. Before we can even decide where to begin, up or down, we should know what seems to be lacking in developing countries.

The Missing Ingredients³:

The supply of missing ingredients is needed to sustain the current level of economic development and to bring the country into a higher level. For many developing countries, the missing ingredients include capital, technology, foreign exchange, and entrepreneurship.

In general, developing countries have favorable factor endowments or comparative advantage⁴ in land⁵ and labor. It has a comparative disadvantage in the supply of capital, entrepreneurship, and technology. These are the comparative advantages of more developed countries and the missing ingredients for developing countries.

Developing countries could wait until they increase capital formation, develop local entrepreneurial skills, and develop the needed technology on their own. Chances are they do not have adequate economic base to do these on their own. To complicate the issue, many developing countries want to increase the rate of development in the shortest time possible. This situation puts developing countries in a position whereby the missing ingredients are to be supplied from more developed countries.

The vehicle for putting these ingredients to work is through a mix of policies and the planning of development projects. Examples of policy instruments that are used to enhance the supply of the missing ingredients include fiscal policy (taxation and subsidies), monetary policy (supply of money, banking and foreign exchange), trade and investment policy, and sectoral reform policies in education, manpower, agriculture, and industry. The amount of capital, kinds of technology, and the newly acquired skills in entrepreneurship that resulted from the implementation of these policies are then channeled to the design of development projects. On the other end of the spectrum, development projects are also vehicles for the supply of these missing ingredients instead of just being the recipient.

The following example illustrates how a development project serves as a vehicle for utilizing and enhancing the supply of the missing ingredients: A large transportation project for providing urban railway system for a city will be designed in such a way as to attract capital from abroad, transfer a needed technology, and to prepare local investors to manage the project. In the financing side, the government, through the national development bank, will encourage the formation of investment consortium consisting of domestic commercial banks, local companies, foreign corporations and foreign banks. This is for the purpose of raising capital from outside sources. A part of capital requirement could also be raised through flotation of bonds in the international market.

As a member of the financing consortium, a foreign transportation corporation could design and implement the project through a build, operate, and transfer (BOT) arrangement with the government. The BOT agreement will require that the foreign transportation corporation will transfer the needed technology, either completely or partially, to the country. For a definite period of time, the foreign transportation company, through its subsidiary, will operate the railway system based on an agreed-upon revenue sharing with the government. After the BOT period the railway system will be transferred either to a corporation wholly owned by the government or to a private domestic corporation.

Following the above design concept, the development project was able to attract foreign capital, acquire a needed technology, and prepare domestic entrepreneurs to manage the project and similar projects. The railway transit project would also save significant foreign exchange in the form of saved imported fuel destined for ordinary road transportation. The changes brought about by the project will also generate other domestic investments involving local and foreign investors. These are the missing ingredients in a developing country. This simple illustration captures the fundamentals in designing development projects. At the end, the project could have brought about the following socio-economic benefits: increase employment, saving or earning foreign exchange, transfer of technology, development of entrepreneurial skills, and financial revenues to the government and the domestic corporation.

The process of supplying the missing ingredients is a continuous process. As the country gains more development momentum, demands for these missing ingredients will increase. Logically, it can be assumed that as the country develops, its capacity to absorb the missing ingredients will also increase.

Levels of Economic Development⁶:

The identification and subsequent designing of development projects should be based on the present level of economic development and the desire of the country to reach the next higher level. Some countries are very poor, some are not too poor, and the others are already reaching a higher level of economic development. A project that may be appropriate for one country may not be sustainable in another. Countries belonging to different levels of economic development have different infrastructure base, financial capability, technology endowments, educational and skills base, and other fundamentals to sustain a project. A mass transport system project may be appropriate to an urbanized and commercial city of a more developed country but may not be sustainable in less developed countries.

For simplicity I can divide countries into three categories, more or less, following the general classification based on the three stages of economic growth: Low Level Development, Mid-Level Development, and High Level Development. In the stages of economic growth, the first stage is called pre-takeoff stage, the second stage is takeoff stage, and the third level is mass consumption stage.

The Low Level Development (LLD) countries are those countries that are still trying to build a momentum for economic development. In short, they have not taken off yet. Their development batteries are weak and need to the charged with the missing ingredients mentioned above. On the other hand, the Mid-Level Development (MLD) countries have acquired certain momentum for development and are trying to sustain it. If these countries are able to sustain their momentum, they might become High Level Development (HLD) countries. HLD countries could have reached the stage of full industrialization. The World Bank classification of countries into low-income countries, middle-income countries and high-income countries also more or less corresponds to these levels of economic development. The classification is based on gross national product per capita. LLD and MLD countries are normally called developing countries.

There appears to be a distinction between stages of economic growth and levels of economic development. The first normally refers to increases in gross national product or national income while the later refers to a combination of socio-economic factors including the increase in national income. Development implies that economic gains have been transformed to social gains for the majority of population. It connotes a more sustainable transformation rather than a simple increase in national income. A country might have discovered a vast reservoir of oil thus increasing its income but unless such revenues are transformed into investments in socio-economic structures (education, health, physical infrastructures, and the development of other productive sectors), such increase in income would not bring development. The discussion of the levels of economic development in this book follows the later interpretation. However, the prevailing classification of developing countries is still based on GNP per capita.

Low level development countries are mainly agricultural where a large portion of labor force is engaged in agricultural production. The consumption pattern is basic where products reach the final consumption with very little processing. Their export is mostly minerals and agriculture. Energy consumption (a determinant of industrial activities) is small. Its physical infrastructure (as in transportation and communication) and socio-economic infrastructure (as in education and health) are still underdeveloped. Although there are few high tech hospitals and schools in these countries, their market is confined to a very small percentage of population, mostly in higher income urban centers⁷. The rest of the country could only afford a lower tech health and educational services.

In general, the appropriate development projects for these countries are those that should bring about improvement in agricultural production and should take advantage of the country’s comparative advantage on labor. The technology should be agriculture oriented and labor intensive. Even in the building of physical infrastructures such as transportation and communication facilities, the government and private investors would find it more profitable to employ a labor-intensive technology.

The development dilemma in many developing countries, especially in countries belonging to low level of development, is characterized by a vicious cycle: low income results to lack of capital and technology, lack of capital and technology results to low productivity, low productivity results to low income.

To break this cycle, the country should invest in the development of infrastructures to increase its technological absorptive capacity⁸. It means that the country should prepare for the transfer of higher technology that would further increase agricultural production on a given amount of land and facilitate the shifting of agricultural labor to cottage and small-scale industries⁹. However such move requires the supply of other missing ingredients such as capital, entrepreneurial, managerial, and technical skills. The demand for these missing ingredients would then trigger the establishment of development banks and similar development financial institutions.

The middle level development countries, especially those countries just emerging from low level development are still in agricultural production but with a growing small to medium scale industries. It is also characterized by a decreasing portion of labor force still in agriculture. It implies that a significant number of laborers are able to find employment in the growing industrial sector and service sector, and capital intensity is increasing in agricultural production. At this stage, the industrial sector is investing in the production of less sophisticated farm machines and other farm inputs such as fertilizer. It is also engaged in food processing. The technological mix at this stage still utilizes more labor compared to capital-intensive equipment but the amount of labor is noticeably decreasing. The mix depends on how much comparative advantage the country still enjoys on labor.

The portion of labor force still in agriculture continues to decrease as the country continues to develop. The decreasing portion of labor force in agriculture does not mean that agriculture is being abandoned. It simply means that more and more capital-intensive technology is being employed in lieu of sheer manual labor¹⁰. The industrial sector continues to grow with increasing investments in medium scale industries. Some are even adopting a large scale, more automated manufacturing. Medium scale and large-scale industrialization require the application of more sophisticated capital-intensive technology and very significant amount of capital. At this stage, labor is becoming more skillful but demanding more wages. It signals that the country is losing a significant comparative advantage in labor.

High level development countries have attained almost full industrialization in manufacturing and in agricultural production. Because of high wages, everything that is touched by human hands becomes expensive. The manufacturing sector finds it more cost effective to employ more capital-intensive machines than real people. The agricultural sector produces more because it is organized around a large-scale production that facilitates the application of capital-intensive technology. Even the service sector finds it more cost effective to employ more computers than people. You are lucky if you get a real person when you call these companies. Chances are you will be talking to a computer.

Direction of Development:

It appears that the progression of development from one level to the next can be traced through the following:

1. In terms of sectoral production: From agriculture to small and medium industry to full industrialization.

2. In terms of gross national product (GNP): Increasing gross national product per capita (GNP divided by population).

3. In terms of foreign trade: From exporting basic agricultural products and minerals to exporting processed goods.

4. In terms of technology: From labor and land intensive technology to capital-intensive technology. The comparative advantage on labor will diminish as the country develops.

5. In terms of entrepreneurship: From small family-owned cottage industries to medium size private companies, to publicly-owned large corporations¹¹. It signals the growth of entrepreneurial capability in relation to increasing investments.

6. In terms of percentage of labor force in agriculture: From a very significant percentage of labor force in agriculture to a decreasing percentage. It signals a shift of labor to other sectors of the economy including the industrial and service sectors.

7. In terms of urban development: From more rural areas to more urban cities.

8. In terms of energy consumption: From very small energy consumption to very significant energy consumption.

9. In terms of educational infrastructure: From low literacy rate and few skilled manpower to high literacy rates and highly skilled manpower.

10. In terms of health condition: From low life expectancy, high infant mortality rate and few health facilities to higher life expectancy, lower infant mortality rate and adequate supply of medical services.

Development Projects and Socio-Economic Condition:

The design of development projects should consider two important parameters: 1) the socio-economic conditions at the current level of economic development, and 2) the plan of the government to reach the next higher level. The implementation of development projects that do not consider these parameters would be unsustainable. Many developing countries have bad experiences on this regard.

The relationship between the two parameters mentioned above is very confusing. On the surface, development projects designed to propel the country to the next higher level of economic development would by-pass the present socio-economic parameter to create new conditions. It also implies that projects that were designed to operate within the present conditions would be caught in a stagnant orbit. This is only one of the many issues that make development projects unique and should be designed differently from purely private oriented investments. This issue is not so controversial if one recognizes the fact that the projects need both the supply of missing ingredients (capital, technology, and entrepreneurship) and its subsequent absorption into the economy. Sustainability is important in designing development projects. The injection of new resources, mostly from foreign sources, would create new economic opportunities but at the same time would create a condition of dependency if the country’s infrastructure would not be able to absorb and sustain it.

An example is when a project introduced a sophisticated technology in a country whose educational level is very low and nobody could be trained to absorb the technology. The progression should be from the introduction of a more labor intensive to the introduction of more capital intensive technology as the country develops into the next higher level of development. That next higher level of development is assumed to have resulted from the benefits that were received from the old development projects that introduced the labor-intensive technology.

Another example is the establishment of large processing plant requiring a large amount of agricultural product as inputs. This type of project would not be sustainable in a country that is still in subsistence agriculture and there is no adequate supply of agricultural inputs and skilled manpower to operate the plant. Such project would be dependent from other countries supplying both raw materials and skilled manpower. Such dependency would create serious economic dislocation and induce political trouble. The logical progression would be to invest in projects that would produce agricultural surplus for processing, followed by investments in cottage industries and small-scale industries to process the agricultural surplus. The incremental capital earned from both the farmers and the small processors would attract investment in a more improved agricultural technology, which in turn produce more agricultural surplus. As the process continues, the country would find itself in the next higher level of development.

Different countries took different approach to development. Some countries adopted an export-led strategy by concentrating on a few agricultural products and minerals. The foreign exchange earned from the export are used to buy technologies to further enhance agricultural and mineral production and invest in intermediate processing before export, instead of continuing to export basic agriculture such as unprocessed coffee beans. The idea is to gradually introduce capital intensive technology in selected agricultural production and minerals (example is rubber and tin), free up more labor from these sectors and shift them to the intermediate processing industries. As the country earns more and more income from export, it would be able to invest more in higher level manufacturing of not only agricultural based products but also other consumption goods such as electronics. It would also be able to invest in medium scale manufacturing of industrial goods and machines. This process is facilitated by the continuous supply of missing ingredients mentioned previously.

Some developing countries adopted an import-substitution approach as they tried to produce a significant number of previously imported products locally. A similar process of attracting foreign resources (capital, technology, and entrepreneurship) applies. This could be done by attracting foreign corporations to relocate or create domestic subsidiaries. The majority of the products would be destined to local market instead of exporting it. The amount of products destined for export would just cover the cost of imported inputs. Again, the basic assumption in this strategy is that the domestic market is able to buy the products and manufacturing operations could be gradually taken over by the locals. This assumption would be valid only if the country has previous investments in development projects that would increase local income, improve entrepreneurial ability, and improve the skills of its manpower. Somebody has to start somewhere. If the country is still in a low development level, the priority is to invest more in agriculture related projects to increase local income since a greater percentage of labor force is still in agriculture. Income from agriculture will facilitate investment in agri-business and small scale industry that would gradually free labor from the agricultural sector.

Many countries depend on external aid to supply their missing ingredients. The foreign resources (capital, technology, entrepreneurship) should be invested in development projects that will improve the current economic base and to sustain further investments through the benefits that were derived from previous investments. If the expected benefits did not materialize, either due to mistakes in project design or deliberate misuse of funds (I hate to use the word corruption), dependency on foreign assistance will result.

The wild card in the process of economic development appears to be the role of labor in particular and the welfare of the population in general. Development strategies should carefully calibrate the shifting of labor from one sector to another. Increasing population and the subsequent addition to the labor force puts tremendous pressure on the government. If the new additions are kept in agricultural sector, land will reach the point of diminishing returns and agricultural wage will fall. The fall in agricultural wage in a mainly agricultural economy will bring about a reduction in standard of living, which, if unchecked, will develop into political problem. Political disturbances could erode what little gains have been achieved in the past.

Social Overhead Capital (SOC) and Direct Productive Activities (DPA):

In almost every developing country the creation of overhead capital, which is sometimes referred to as "social overhead