Lecture 7: Lecture 7: Basics of Basics of Project PlanningProject Planning

Learning ObjectivesLearning Objectives

• Part 1Part 1: Introduce concepts, : Introduce concepts, procedures regarding the analysis procedures regarding the analysis of agri/aquaculture projectsof agri/aquaculture projects

• Part 2Part 2: Sources of funding and : Sources of funding and tactical objectivestactical objectives

The Project ConceptThe Project Concept

• All projects suffer from poor All projects suffer from poor preparationpreparation

• Project planning: identifies national, Project planning: identifies national, regional and/or company goalsregional and/or company goals

• selects priority areas of development selects priority areas of development (hatchery, farm, processing plant?)(hatchery, farm, processing plant?)

• designs effective pricing policiesdesigns effective pricing policies• mobilizes necessary resourcesmobilizes necessary resources

Why is Planning Why is Planning Required?Required?

• Waste is a tragic loss to poor Waste is a tragic loss to poor countriescountries

• Projects are typically Projects are typically underestimated with respect to time underestimated with respect to time and effortand effort

• When money sits in a bank, the When money sits in a bank, the bank does not care, you still have to bank does not care, you still have to pay debt servicepay debt service

• He who hesitates is lost.He who hesitates is lost.

What is a Project?What is a Project?

• DefinitionDefinition: the whole complex of : the whole complex of activities using resources to gain activities using resources to gain benefitsbenefits

• investment activity: cash, equity, long-investment activity: cash, equity, long-term financingterm financing• financial resources are expendedfinancial resources are expended• capital assets are createdcapital assets are created• benefits hopefully appreciate over timebenefits hopefully appreciate over time

Characterizing Characterizing Aquaculture ProjectsAquaculture Projects

• Two types: Two types: economic developmenteconomic development and and private company (firm)private company (firm) type type

• large scale economic development large scale economic development type projects are part of a large type projects are part of a large program (e.g., World Bank irrigation program (e.g., World Bank irrigation projects)projects)

• can even be divided into smaller can even be divided into smaller subprojects (e.g., CJEDP)subprojects (e.g., CJEDP)

• usually involve local counterpartsusually involve local counterparts• sometimes funded and administered sometimes funded and administered

by two different governmentsby two different governments

Private Investment Private Investment (Firms)(Firms)

• Usually small, minimum size from a Usually small, minimum size from a financial standpointfinancial standpoint

• technologically, administratively feasibletechnologically, administratively feasible• specific starting point and end pointspecific starting point and end point• specific objectivesspecific objectives• boundaries and clientele clearly definedboundaries and clientele clearly defined• wholly independent administrative wholly independent administrative

structurestructure• funded through a mix of cash, equity, funded through a mix of cash, equity,

long-term financinglong-term financing

Project PlanningProject Planning

• Most important factor is to have good Most important factor is to have good planningplanning

• information includes potential and information includes potential and ongoing investments in the areaongoing investments in the area

• What effect will these investments have What effect will these investments have on growth? How will they affect your on growth? How will they affect your project? How much can be spent over project? How much can be spent over duration of the project?duration of the project?

• What resources are available for What resources are available for specific investment?specific investment?

Project PlanningProject Planning

• Projects are usually selected based in part Projects are usually selected based in part on numerical indicators of value of costs on numerical indicators of value of costs and returns (ROI, NPV, IRR, etc.)and returns (ROI, NPV, IRR, etc.)

• large-scale projects look at the same as large-scale projects look at the same as above, but also national income, income of above, but also national income, income of typical farmertypical farmer

• the typical yardstick might be the typical yardstick might be market pricemarket price (actual price at which goods and services (actual price at which goods and services are traded)are traded)

• sometimes market price is not used; sometimes market price is not used; instead, a better indicator of value (instead, a better indicator of value (shadow shadow priceprice) is used () is used (shadow priceshadow price = value based = value based on scarcity of the resource)on scarcity of the resource)

Project PlanningProject Planning• Good planning also helps provide financial Good planning also helps provide financial

assistance to both types of projectsassistance to both types of projects• large-scale projects often concentrate on large-scale projects often concentrate on

investment from investment from outside sourcesoutside sources (e.g., the (e.g., the World Bank)World Bank)

• often suggested they also look at often suggested they also look at local local assistanceassistance (local development banks); (local development banks); however, criteria are differenthowever, criteria are different

• small-scale projects often have to look small-scale projects often have to look bothboth inside the country and outsideinside the country and outside

• Homework: come up with a concept/name for Homework: come up with a concept/name for your project, create a list of possible funding your project, create a list of possible funding sources available to aquaculture projectssources available to aquaculture projects

Project Planning Project Planning TargetsTargets

• Large-scale projects target broader Large-scale projects target broader implications than private investment implications than private investment projects (e.g., social benefit, national projects (e.g., social benefit, national income)income)

• helpful to scrutinize just what are the helpful to scrutinize just what are the policy or production targetspolicy or production targets

• in large-scale projects, the issue of in large-scale projects, the issue of planning is often complicated by a need planning is often complicated by a need to coordinate with other plans and to coordinate with other plans and investmentsinvestments

• both project types must consider both project types must consider scarcity of investment funds, foreign scarcity of investment funds, foreign exchange rates, labor issues, etc.exchange rates, labor issues, etc.

The Project Format - The Project Format - Its Its AdvantagesAdvantages

• Advances/assesses by organizing info from Advances/assesses by organizing info from many sourcesmany sources

• gives gives ideas on costideas on cost, year by year, effects on , year by year, effects on participants, possible incentivesparticipants, possible incentives

• allows allows better judgementbetter judgement re-organization, re-organization, administration problems are faced head-onadministration problems are faced head-on

• gives mgrs/planners better criteria for gives mgrs/planners better criteria for monitoring progress/implementationmonitoring progress/implementation

• encourages checking-out other alternativesencourages checking-out other alternatives• controls reliability of datacontrols reliability of data• format well-suited to production projects format well-suited to production projects

w/clear-cut investments, valued costs/benefitsw/clear-cut investments, valued costs/benefits

Project Preparation and Project Preparation and AnalysisAnalysis

• Only when all the aspects of a project Only when all the aspects of a project are taken into consideration can its are taken into consideration can its financial impact be truly realized - Why?financial impact be truly realized - Why?

• All elements are inter-relatedAll elements are inter-related• Judgements about one affect the otherJudgements about one affect the other• As project analysts, your job is to As project analysts, your job is to

continually question technicians as to continually question technicians as to whether all aspects have been whether all aspects have been consideredconsidered

The Project CycleThe Project Cycle

• Five phases:Five phases:• 1) 1) identificationidentification (finding the project)(finding the project)• 2) 2) prep/analysisprep/analysis (Does it have merit?) (Does it have merit?)• 3)3) appraisal appraisal (critical review, (critical review,

independent)independent)• 4)4) implementation implementation (getting it started) (getting it started)• 5)5) evaluation evaluation (success or failure) (success or failure)

Identification PhaseIdentification Phase• Involves finding individual projectsInvolves finding individual projects• usually identified by technical specialists, usually identified by technical specialists,

sometimes politicianssometimes politicians• sometimes identified from other proposals sometimes identified from other proposals

to extend on-going programsto extend on-going programs• suggestions often arise due to present or suggestions often arise due to present or

anticipated lack of supply of some productanticipated lack of supply of some product• can be identified via common knowledge, can be identified via common knowledge,

market trends, import statisticsmarket trends, import statistics• also by existing EDP’s, bank reports, etc.also by existing EDP’s, bank reports, etc.

Preparation/Analysis Preparation/Analysis PhasePhase

• This includes all work done to bring the This includes all work done to bring the project to the point of appraisalproject to the point of appraisal

• first stepfirst step: feasibility study or business plan: feasibility study or business plan• these documents define objectives, these documents define objectives,

suggest alternatives, indicate most suggest alternatives, indicate most efficient plan, convinceefficient plan, convince

• includes a preliminary financial or includes a preliminary financial or economic analyseis (better now vs. later)economic analyseis (better now vs. later)

• nothing moves forward without financialsnothing moves forward without financials

Preparation/Analysis Preparation/Analysis PhasePhase

• Business plans and feasibility studies take Business plans and feasibility studies take time and moneytime and money

• business plan: about two monthsbusiness plan: about two months• feasibility study: compares projects, longerfeasibility study: compares projects, longer• costs are as high as 10% of project valuecosts are as high as 10% of project value• regained as improved ROIregained as improved ROI• undertaken by special team of consultantsundertaken by special team of consultants

Appraisal PhaseAppraisal Phase

• Critical review, independent evaluationCritical review, independent evaluation• re-examines every aspect of the project re-examines every aspect of the project

plan to assess its logic/value prior to plan to assess its logic/value prior to release of big moneyrelease of big money

• may involve new informationmay involve new information• required by most funding agenciesrequired by most funding agencies• feasibility study read/approved by feasibility study read/approved by

someone outside the agencysomeone outside the agency

Implementation PhaseImplementation Phase• Objective of previous phases is to have Objective of previous phases is to have

a project that can be implemented to a project that can be implemented to the benefit of recipientsthe benefit of recipients

• the better and more realistic the project the better and more realistic the project plan, the easier to implementplan, the easier to implement

• more likely it will be successful or more likely it will be successful or beneficialbeneficial

• implementation needs to be flexible, implementation needs to be flexible, though, considering changes in prices though, considering changes in prices and technologyand technology

• the greater the uncertainty or novelty of the greater the uncertainty or novelty of the project, the more changes will occurthe project, the more changes will occur

Evaluation PhaseEvaluation Phase

• This phase regards evaluation of This phase regards evaluation of success or failure elements of a project success or failure elements of a project with relevance to the futurewith relevance to the future

• usually takes place throughout the usually takes place throughout the project, but sometimes only at the endproject, but sometimes only at the end

• undertaken by sponsoring company, undertaken by sponsoring company, agency, etc.agency, etc.

• some projects have separate internal some projects have separate internal units for this or use outsidersunits for this or use outsiders

• Are or have objectives being/been met? Are or have objectives being/been met? If not, were the objectives realistic?If not, were the objectives realistic?

Evaluation PhaseEvaluation Phase• Was the technology proposed appropriate?Was the technology proposed appropriate?• Were the institutional, management Were the institutional, management

arrangements suited to the conditions?arrangements suited to the conditions?• Were the financial aspects carefully worked Were the financial aspects carefully worked

out?out?• Were the economic aspects carefully Were the economic aspects carefully

explored?explored?• Did management quickly respond to Did management quickly respond to

changes?changes?• Was its response carefully considered and Was its response carefully considered and

appropriate?appropriate?• How could the project’s structure be How could the project’s structure be

changed to make it more flexible?changed to make it more flexible?

Accuracy of Project Accuracy of Project AnalysisAnalysis

• They are supposed to be the basis for They are supposed to be the basis for investment decisions; however …investment decisions; however …

• How accurate are they in foretelling future How accurate are they in foretelling future results?results?

• Usually take the shape of performance Usually take the shape of performance reviews at end of implementation phasereviews at end of implementation phase

• typical indicator is ROItypical indicator is ROI• most EDP’s yield 20-25% returnsmost EDP’s yield 20-25% returns• however, ROI is misleading due to changes however, ROI is misleading due to changes

in pricesin prices• poor financial predictability is the result of poor financial predictability is the result of

inappropriate technology, poor inappropriate technology, poor management, delaysmanagement, delays

Why Projects Often Go Why Projects Often Go WrongWrong

• When analysis fails to predict project When analysis fails to predict project success, it is likely due to poor project success, it is likely due to poor project design and faulty implementationdesign and faulty implementation

• projects are then typically audited to projects are then typically audited to determine the reasons for poor determine the reasons for poor performanceperformance

• inappropriate technologyinappropriate technology• inadequate support inadequate support

systems/infrastructuresystems/infrastructure• failure to appreciate social environmentfailure to appreciate social environment• administrative problemsadministrative problems• adverse policy environmentadverse policy environment

Part 2: Part 2: Sources of Sources of FundingFunding

Learning ObjectivesLearning Objectives

• Strategic policy objectives in Strategic policy objectives in setting up projectssetting up projects

• Investment strategiesInvestment strategies• Tactical objectivesTactical objectives• Sources of fundingSources of funding• Investment appraisal methods, Investment appraisal methods,

indicesindices

Introductory CommentsIntroductory Comments

• Setting up an aquaculture project Setting up an aquaculture project typically requires substantial typically requires substantial investmentinvestment

• financial implications must be financial implications must be addressed well in advanceaddressed well in advance

• we will look at the likely costs of we will look at the likely costs of such projectssuch projects

• focus on ideas which are most focus on ideas which are most criticalcritical

Strategic/Policy Strategic/Policy Objectives of Objectives of

Aquaculture ProjectsAquaculture Projects

• Governmental agenciesGovernmental agencies: social benefit, : social benefit, national income via increased taxationnational income via increased taxation

• Development agencies: social benefit, Development agencies: social benefit, securing of resourcessecuring of resources

• others:others: attracting foreign investment, attracting foreign investment, improving balance of trade, improving balance of trade, transmigrationtransmigration

• aquaculture investors, analysts must aquaculture investors, analysts must weigh the good against the badweigh the good against the bad

Socio-economic benefits derived Socio-economic benefits derived from an aquaculture projectfrom an aquaculture project

AQUACULTUREPROJECT

Income

Employment

Taxes

Production

Supply of Product

Demand for Materials

Individual

Family

Municipal

National

Domestic Market

Export Market

Domestic Market

Import Substitution

Additional Supply

Improved Std.Of Living

National/CommunityDevelopment

Foreign Exch.Savings

Lowering of Prices

Increased ForeignExchange Reserves

Stimulation of Economy

How Aquaculture How Aquaculture Projects Attract Projects Attract

Foreign InvestmentForeign Investment• Relaxing exchange controlsRelaxing exchange controls• flexibility in foreign:local joint venturesflexibility in foreign:local joint ventures• simplifying legal requirements/red tapesimplifying legal requirements/red tape• providing training, information, supportproviding training, information, support• promoting auxiliary industries (feed mills, promoting auxiliary industries (feed mills,

processing plants, etc.)processing plants, etc.)• cutting duties on imports of equipment and cutting duties on imports of equipment and

raw materialsraw materials• providing tax “holidays” during providing tax “holidays” during

implementation phaseimplementation phase• permitting repatriation of profits/assetspermitting repatriation of profits/assets• providing infrastructure (aquaparks)providing infrastructure (aquaparks)

Investment StrategiesInvestment Strategies

• Private ventures range in size from large, Private ventures range in size from large, vertically integrated firms to small backyard vertically integrated firms to small backyard operationsoperations

• single common element: single common element: profitprofit• investment decisions vary dependent upon investment decisions vary dependent upon

scalescale• large companies usually look at long-term large companies usually look at long-term

trends, look at product cycling trends, look at product cycling • sometimes invest in unprofitable pilot projects sometimes invest in unprofitable pilot projects

in order to receive better future returnin order to receive better future return

Investment Strategies: Investment Strategies: smallholderssmallholders

• Aquaculture often serves as an alternative to Aquaculture often serves as an alternative to other activitiesother activities

• examples: agriculture, salt productionexamples: agriculture, salt production• switching to aquaculture almost always switching to aquaculture almost always

means loss of income from established cropsmeans loss of income from established crops• ““low risk” culture practices are often used to low risk” culture practices are often used to

keep impact to a minimumkeep impact to a minimum• focus is on profitability of each runfocus is on profitability of each run• farmer needs other occupation, income to farmer needs other occupation, income to

cover periods of no aquaculture activitycover periods of no aquaculture activity

Aquaculture and Farm Aquaculture and Farm IncomeIncome

• Introducing aquaculture to smallholders can help Introducing aquaculture to smallholders can help raise their incomeraise their income

• however: sources of inputs (fry) must be availablehowever: sources of inputs (fry) must be available• markets must be accessiblemarkets must be accessible• usually finfish production can produce greater usually finfish production can produce greater

yields for less input (more forgiving)yields for less input (more forgiving)• crustacean culture requires higher costs for lower crustacean culture requires higher costs for lower

yieldsyields• finfish production techniques are simplerfinfish production techniques are simpler• lower value of finfish also keeps it in local marketslower value of finfish also keeps it in local markets

Overlap Between Overlap Between Private Sector and Private Sector and

Public SectorPublic Sector

• Allows for cooperation and coordination of Allows for cooperation and coordination of efforteffort

• government hatcheries are good examplegovernment hatcheries are good example• contract growing schemes (nucleus estate contract growing schemes (nucleus estate

planning)planning)• passing of laws specific to aquaculturepassing of laws specific to aquaculture• organization of meetings, conferences, organization of meetings, conferences,

seminarsseminars

Tactical Development Tactical Development ObjectivesObjectives

• Often specified with respect to desired rate Often specified with respect to desired rate of return (ROI)of return (ROI)

• other criteria used: net profit before taxes, other criteria used: net profit before taxes, cashflows, net present valuecashflows, net present value

• returns reflect the sources of and cost of returns reflect the sources of and cost of the capital employed:the capital employed:

• the cost of risk venture capital or equity the cost of risk venture capital or equity depends upon return expected by depends upon return expected by shareholdersshareholders

Tactical Objective: Tactical Objective: debt:equitydebt:equity

• Cost of funds borrowed from a funding/loan Cost of funds borrowed from a funding/loan institution vary according to interest rates, institution vary according to interest rates, duration, size of loanduration, size of loan

• cost of loans is less than the cost of risk cost of loans is less than the cost of risk equityequity

• average cost of capital is dependent upon average cost of capital is dependent upon “gearing ratio” (“gearing ratio” (debt:equity ratiodebt:equity ratio))

• when interest rates are low, D/E ratio is highwhen interest rates are low, D/E ratio is high• equity-based companies do better when equity-based companies do better when

interest rates are highinterest rates are high

Tactical Objectives: Tactical Objectives: rate of returnrate of return

• What is an appropriate rate of return?What is an appropriate rate of return?• Aquaculture represents risk and is hazardous Aquaculture represents risk and is hazardous

compared to other venturescompared to other ventures• therefore it must generate higher than normal therefore it must generate higher than normal

returns to be attractive/worthwhilereturns to be attractive/worthwhile• most banks look at 20-25% ROI as favorablemost banks look at 20-25% ROI as favorable• other option is to assign a other option is to assign a risk premiumrisk premium of of

5% over normal return5% over normal return• the higher the intensity or more untried the the higher the intensity or more untried the

technology, the higher the risk premiumtechnology, the higher the risk premium

Funding SourcesFunding Sources

• There are two basic sources of funding: 1) There are two basic sources of funding: 1) capital assistancecapital assistance and 2) and 2) private investmentprivate investment

• capital assistance = loans, grant aid, cash grantscapital assistance = loans, grant aid, cash grants• for developing nations, this comes from external for developing nations, this comes from external

loans (World Bank, Commonwealth Development loans (World Bank, Commonwealth Development Corporation, Banco International de Desarollo, Corporation, Banco International de Desarollo, etc.)etc.)

• grant aidgrant aid: USAID, UNIDO, WHO, Swiss, Japanese, : USAID, UNIDO, WHO, Swiss, Japanese, NorwegiansNorwegians

• developed countriesdeveloped countries: subsidies and enterprise : subsidies and enterprise grantsgrants

Funding Sources: Funding Sources: capital assistancecapital assistance

• Most loans provided are low interest rate, Most loans provided are low interest rate, extended repayment, concessionary in natureextended repayment, concessionary in nature

• high percentage of Asian Development Bank high percentage of Asian Development Bank loans are for aquacultureloans are for aquaculture

• around 10% of all aquaculture loans are via around 10% of all aquaculture loans are via the World Bankthe World Bank

• grant-aid/grants are not paid back, real grant-aid/grants are not paid back, real benefit is in reducing trade imbalancesbenefit is in reducing trade imbalances

• assistance is often provided in form of assistance is often provided in form of technologytechnology

Funding Sources: Funding Sources: credit institutionscredit institutions

• These sources are typically accessed by These sources are typically accessed by smallholderssmallholders

• consist of agricultural, fisheries and consist of agricultural, fisheries and cooperative banks with numerous branchescooperative banks with numerous branches

• small loans are provided promptly with small loans are provided promptly with minimum bureaucracyminimum bureaucracy

• some technical and marketing assistance some technical and marketing assistance providedprovided

• briefing to farmers on purpose and use of briefing to farmers on purpose and use of credit should also be provided (not often)credit should also be provided (not often)

Funding Sources: Funding Sources: private investmentprivate investment

• Can be foreign or domesticCan be foreign or domestic• private or public sale of equity (shares/stock)private or public sale of equity (shares/stock)• backed up by commercial financingbacked up by commercial financing• sometimes referred to as venture capital or sometimes referred to as venture capital or

equityequity• venture capital available through specialized venture capital available through specialized

companies (CAIM)companies (CAIM)• they expect high rates of return and consider they expect high rates of return and consider

capital needs of aquaculture firms typically capital needs of aquaculture firms typically too smalltoo small

Funding Sources: Funding Sources: venture capitalventure capital

• Criteria include: annual growth rates of 25-50%Criteria include: annual growth rates of 25-50%• pre-tax margins of at least 35%pre-tax margins of at least 35%• minimum ROI of at least 30%minimum ROI of at least 30%• public offering of stock in 5-8 yearspublic offering of stock in 5-8 years• must be unique technologymust be unique technology• 30% ownership of project by venture capital 30% ownership of project by venture capital

firmfirm• minimum investment of around $500,000minimum investment of around $500,000• exit strategy on public sale of 4-7xexit strategy on public sale of 4-7x

Funding Sources: Funding Sources: public salespublic sales

• Accomplished through offering of Accomplished through offering of salessales

• large publicly-traded companies large publicly-traded companies offer shares for sale, but often not offer shares for sale, but often not in reference to only their in reference to only their aquaculture effortsaquaculture efforts

• aquaculture is considered a aquaculture is considered a diversificationdiversification

Funding Sources: Funding Sources: joint venturesjoint ventures

• Developing nations have attracted foreign Developing nations have attracted foreign investment via aquacultureinvestment via aquaculture

• Why? Land is cheaper, labor cheap, Why? Land is cheaper, labor cheap, favorable climatefavorable climate

• often this is an arrangement between a local often this is an arrangement between a local owner and foreign investorowner and foreign investor

• production targets the export market due to production targets the export market due to limited local market (product too expensive)limited local market (product too expensive)

• regulations as to percentage ownership varyregulations as to percentage ownership vary

Funding Sources: Funding Sources: joint venturesjoint ventures

• Many joint ventures with foreigners call for Many joint ventures with foreigners call for foreign partner providing technical foreign partner providing technical expertiseexpertise

• if “technical expertise” has no experience if “technical expertise” has no experience within country, project usually started as a within country, project usually started as a pilotpilot

• only if technical experts are really only if technical experts are really experienced should construction start experienced should construction start immediatelyimmediately

• site must achieve recommended criteriasite must achieve recommended criteria

Funding Sources: Funding Sources: joint venturesjoint ventures

• Most loan institutions consider cash kingMost loan institutions consider cash king• consultants taking an equity position can consultants taking an equity position can

seldom convince them to recognize their seldom convince them to recognize their consulting ratesconsulting rates

• equity fund/venture capital partners are very equity fund/venture capital partners are very skeptical of anything but cashskeptical of anything but cash

• they will want to see the company established, they will want to see the company established, land purchased, business plan, financials, land purchased, business plan, financials, distribution of shares, compensation packages, distribution of shares, compensation packages, etc. prior to taking the plungeetc. prior to taking the plunge

Evaluating Joint Evaluating Joint Venture PartnersVenture Partners

• Partners can be cash or in-kind (e.g., land) Partners can be cash or in-kind (e.g., land) participantsparticipants

• if in-kind (“sweat equity”), the value of if in-kind (“sweat equity”), the value of shares is often less than par valueshares is often less than par value

• if parnters come in late, they don’t receive if parnters come in late, they don’t receive a 1:1 (par) disbursement of sharesa 1:1 (par) disbursement of shares

• if land is to be used as equity, have it if land is to be used as equity, have it appraised by three parties: your own appraised by three parties: your own appraiser, the land owner’s appraiser, and appraiser, the land owner’s appraiser, and by a neutral third-party (take the average)by a neutral third-party (take the average)

Other Funding IssuesOther Funding Issues

• Aquaculture’s bad track record on debt Aquaculture’s bad track record on debt service, loan payback (examples)service, loan payback (examples)

• simple ignorance of aquaculture on part of simple ignorance of aquaculture on part of funding agenciesfunding agencies

• most companies go bankrupt due to lack of most companies go bankrupt due to lack of cash (undercapitalized), not lack of profitscash (undercapitalized), not lack of profits

• financial crisis often result in rapid failure, financial crisis often result in rapid failure, whereas biological crisis can be solvedwhereas biological crisis can be solved

• recognition of adequate funds for recognition of adequate funds for implementation phase is criticalimplementation phase is critical