History of Project Management
Project approach has long been the style of doing business or implementing or undertaking tasks – particularly in construction industry. In 1917 Henry Gantt developed the Gantt chart as a tool for scheduling work in job shops. Modern project management began with the Manhattan Project, which the U.S. military led to develop the atomic bomb In 1958, US Navy developed PERT charts In the 1970s, the military began using project management software, as did the construction industry. By the 1990s, virtually every industry was using some form of project management
Project management
“The whole discipline and art of project management is going to be an essence of management training, operational excellence and value added.” - Tom Peters Project management is the discipline of planning, organizing, securing and managing resources to bring about the successful completion of specific project goals and objectives. It is sometimes conflated with program management, however technically that is actually a higher level construction: a group of related and somehow interdependent engineering projects. The application of modern management techniques and systems to the execution of a project from start to finish, to achieve predetermined objectives of scope, quality, time and cost, to the equal satisfaction of those involved. Project management is the process by which projects are defined, planned, monitored, controlled and delivered such that the agreed benefits are realised. Projects are unique, transient endeavors undertaken to achieve a desired outcome. Project management is the discipline of planning, organizing, and managing resources to bring about the successful completion of specific project goals and objectives Webster’s dictionary: A proposal of something to be done, Plan; scheme, an undertaking; specific task, A special unit of work, research, etc. as in school, a laboratory, etc. An extensive public undertaking, as in conservation, construction, etc.
What is project
A project is a temporary endeavor undertaken to accomplish a unique purpose A project is a carefully defined set of activities that use resources (money, men, materials, machines, energy, provisions, communication, etc.) to meet the pre-defined objectives. Characteristic features of major projects: • • • Projects are usually very large & capital intensive They are often dedicated to a single purpose & none of the equipments can be used for other purpose Time for project development & implementation is quite long, returns are deferred for some
years
• • • •
They are often located at remote sites demanding additional unproductive investment in infrastructure They often exceed capacity of a single organization to plan, supply & construct They are technically complex demanding resources of skill, manufacturing & production which are not easily or widely available Their functions often overflow national boundaries and their products have international impact
Attributes of projects Unique definable single purpose. Temporary, one time activity, never to be exactly repeated. Require resources, often from various areas. Teams are formed for a purpose and disbanded after achieving the purpose. Projects cut across the organizational lines; many disciplines are involved. Should have a primary sponsor and/or customer / stake holder/s Involve uncertainty and unfamiliarity, does not fall under the “routine” category of activity Project is the process of working to achieve a pre-defined goal and during the process, the project may pass through various phases Examples Pyramid of egypt (2500 b.c. 2.3 mn. Stone blocks weighing 2 to 70 tons each, quarried and carried over the niles, height equivalent of 40 storey building, 13 acres of land, deviation of less than an inch in levels, stones fixed with accuracy of .04 inch!!) 100,000 laborers, 40,000 skilled masons, over 150,000 women & children to be housed & fed! Numerous other examples like taj mahal, eiffel tower, international space station by nasa, anti missile system developed by india, etc. From construction, information technology to research, projects could be conceived in all possible fields. Each project is unique in many ways. At corporate level: - restructuring - relocation / diversification (new plant) or expansion - acquisition / merger - new product or system development At family / personal level: - remodeling of a home - wedding in a family - moving to another house Most artistic endeavours are projects!! (taj mahal, statue of liberty, eiffel tower, etc.) Saving human life in the event of natural calamities / disasters is also a project. (earthquake in gujarat or maharashtra, tsunami, chernobyl, etc.). Social uplift programs, family planning, aids control, etc. Types of projects Manufacturing Projects Designed or built to order machines /equipment New product development projects Infrastructure projects
Greenfield Projects Establish buildings or operating plants at remote sites Completely new projects Scientific Research Projects Innovative, experimental, developmental System development Projects Systems / software development & implementation Management Projects Managing change within organization Exceptions….. Building a skyscraper is a project; but mass construction of pre-fabricated homes is a scheduled and repetitive task rather than a project. Repetitive work of accounts and audits is not a project. Exploratory mission to Mars or Moon are projects; conducted tours to tourist places are not projects. The Triple Constraint Every project is constrained in different ways by its Scope goals: Quantity & Quality Time goals Cost goals It is the project manager’s duty to balance these three often competing goals. The Project Management Triangle The discipline of project management is about providing the tools and techniques that enable the project team (not just the project manager) to organize their work to meet these constraints.
What is Project Management? Today, the definition of a project is no more confined to engineering, technology and research; But has expanded to include various fields / situations, one time crisis, and dealing with difficult issues. It has been realised that the solution to majority of corporate problems involves obtaining better control and optimum use of existing corporate resources. Project Management is one of the techniques being considered. Project management is being used by a wide range of disciplines and corporations that had never previously considered it as a viable method of performing work Legal offices, hospitals, banking and other services as well as traditional manufacturing firms are increasingly using project management to improve the delivery of their services or for creation of new products. Some typical examples are: ? Annual budgeting / auditing exercises ? Introduction of new systems (ISO 9000) ? Effecting change in structure, staffing, or style of Organization ? Software development & implementation ? Development of new product / Service Campaign for new product launch / election ? Organizing AGM / sales conference / event
Project management is “the application of knowledge, skills, tools, and techniques to project activities in order to meet or exceed stakeholder needs and expectations from a project” (PMI) *, Characteristics of projects Project can be described as a unique set of co-ordinated and inter-related activities undertaken by an organisation to meet defined objectives; that has an agreed start and finish time; is constrained by cost & resources and has specified performance requirements. Projects are unique in nature. Everything is special and “one-off”. Designs are new and usually unproven. Every industrial or commercial project is a risk venture. The job of the manager is to identify the risks and, through his project management, contain them. The application of techniques and management practices that have been developed will depend on the size and type of project, and upon the relative priorities, which are assigned to the cost, time and performance objectives. Project has a definite start and finish (Scope goals –quantity and quality and Time goals). Project consists of a well-defined and unique collection of jobs, activities, or tasks which when complete; mark the end of project. Project is constrained by cost, time & resources and has specified performance requirements. The jobs may be started or stopped independent of each other, within a overall given sequence. The jobs are ordered - i.e., they must be performed in technological order. Project Stakeholders Stakeholders are the people involved in or affected by project activities Stakeholders include The project sponsor or promoter, equity / share holders Project team, Support staff,
Customers / users, Suppliers / Vendors / Sub-contractors, Financial Institutions / lenders / bankers Govt. / Approving authorities Affected population / opponents to the project
Knowledge areas describe the key competencies that project managers must develop
Four core knowledge areas lead to specific project objectives (scope, time, cost, and quantity / quality) Four facilitating knowledge areas are the means through which the project objectives are achieved (human resources, communication, risk, and procurement management) One knowledge area (project integration management) affects and is affected by all of the other knowledge areas
Project Management Tools and Techniques Project management tools and techniques assist project managers and their teams in various aspects of project management Some specific tools include Project Charter and Work Breakdown Structure - WBS (scope) Gantt charts, PERT charts, critical path analysis (time) Cost estimates and Earned Value Analysis (cost) Advantages of Project Management Bosses, customers, and other stakeholders do not like surprises. Good project management (PM) provides assurance and reduces risk. PM provides the tools and environment to plan, monitor, track, and manage schedules, resources, costs, and quality. PM provides a history or metrics base for future planning as well as good documentation. Project members learn and grow by working in a cross-functional team environment
Where is pm appropriate? Five general criteria are: 1. Unfamiliarity: major overhaul and not minor changes.
2. 3. 4. 5.
Magnitude of the effort: substantially more resources required. Changing environment: high-tech industries Interrelatedness: when a joint effort is required. Reputation of the organization: in cases where the risk of financial ruin / loss (market share) is high.
Where is pm not appropriate? Cases not coming under any of the five criteria mentioned earlier. Standardized activities Routine work Projects are shaped by their environment u u u u u u u u u u Time Technology Cultural system Social system Political system Regulatory and legal system Economic system Organisational system. Resources, Budgets,
Current project environment Increasing global competition Rapid technological change Rapid product obsolescence rate Organisational downsizing Business re-engineering Empowerment Focus on quality & continuous improvement Information deluge Faster communication Inter-organisational systems Impact of current project environment on organizations • • • • Projects are given more importance by the management for survival of the organization Increasing need felt to do projects right & successful the first time More limitations on resources and lesser organisational support Increasing pressure on project management to achieve quick results
Impact of current environment on projects • • • Projects are tending to get more & more complex & large to handle Projects to be completed ahead of schedule, always. Need more flexibility in defining scope, planning & execution to expand project benefits and
impact
Different stages of a project PROJECT MANAGEMENT
PROJECT PLANNING INVESTME NT DECISION IDEA GENERATI ON FEASIBILIT Y& APPRAISAL Market • Technical • Financial • Economic • Ecological •
PROJECT IMPLEMENTATION SCOPE DEFINITIO N PROJECT ENVIRONME NT RISK ASSESSME NT Sensitivity • Scenario • Simulation • Decision • tree PROJECT SCHEDULI NG GANTT CHART S
PROJECT CLOSURE PROJECT BUDGETING
NETWORK TECHNIQU ES PERT • CPM • CRITICAL • CHAIN
Specifications •
Deliverables • Time frame Activity based • • costing Organization • Cost breakdown • Budgets • Cash flow WBS / CBS • • Earned value •
PROJECT IDENTIFICATION Identification of investment opportunities Most important and first step towards establishing a successful project / venture. Project has to come before project management starts !!! Identifying right business to get into at the right time is an important - albeit difficult task. It calls for “fertile” imagination, sensitivity to changes in environment and realistic assessment of what the firm can do. Process of identification is “Objective” as also a “subjective” process!! Generation of project ideas We live in a world in which the ability of an organization to survive and grow is defined by its capacity to innovate – to identify propitious niches – almost on a continuous basis. Truly niche project ideas are very rare and are based on significant technological
breakthroughs or innovations, which may involve R & D on existing product lines to offer improved variants of existing products or services or entirely new products / services.
Think dynamic. Think different. Think big!!! True success lies in identifying a phenomenon before it becomes a trend!! Every organization should ideally undertake SWOT Analysis and scan the business environment almost on a continuous basis. How to scout for project ideas? 1. Study and analyze the performance of existing Industries: ? Growth and capacity utilization in the industry ? No. of units, Licensed and installed capacity and general performance (production) of the industry. ? Profitability of the existing units in the industry. ? Region-wise study would be essential for specific products 2. Forward and Backward Linkages: Study and analyze the inputs and outputs of existing industries. ? Backward linkages: Are the raw materials / sub-assemblies / other supplies procured from distant sources or imported? Can these be produced more economically locally? Can the companies make rather than buy some parts / components more economically? (Auto ancillary products) ? Forward linkages: Can the output of the existing industry be processed further to obtain value-added products? (Steel or Aluminum rolled products) Can the value addition be done on waste products also ? (e.g. Red Mud from Alumina producers or fly ash from coal based thermal power stations) 3. Review of imports and exports Study import and export statistics for the past five to six years to explore the possibility of import substitution or to set up export oriented units. Import substitution can achieve the following: ? Indigenization and hence bringing new technology to the country. ? Saving valuable foreign exchange and improving balance of payment position. ? Provide market for local products apart from 4. Study of local resources / raw materials Study of availability of local resources in the form of raw materials or skills is important for identifying project ideas based on them. (Examples: coal deposits for power plants, quartz for glass / glass products, Limestone for cement, Hops for beer or grapes for wine, etc. and artisan skills e.g. diamond cutting or jewelery, silk production, etc. Reports published by GSI, NCAER, etc. give useful information on resources and potential industries which can be started in different regions or at different locations. 5. Discussions with Financial Institutions, Lending or Development Agencies: State Financial Corporations, Industrial and Investment Corporations prepare comprehensive reports to attract investments to their states. These reports usually give very important information and hence viable project ideas to potential investors. Many times they engage professional consultants to conduct industrial potential studies for their respective states and prepare these reports. (World Bank, IDBI, ADB, SICOM, MSFC, Agro-Industries Dev. Corporations., etc.) 6. Study Government Guidelines and Plans / planned outlays: Central and State Governments prepare economic plans and budget outlays for different sectors of the economy (e.g. Five Year Plans). These give good idea of the projects that could be started for the future requirements of the Government or to meet the needs of the projects planned by them. (e.g. Sagar Mala, Commodity Exchanges, etc.) 7. Study New Technological Developments:
Many research agencies in India and abroad undertake research on new products and processes. It is useful to keep track of their work. Council of Scientific and Industrial Research Laboratories (CSIR), DRDL, NPL, CFTRI, TERI, Indian Council of Agriculture Research (ICAR), etc. These can be studied in details to look for possibilities of commercial deployment of the research work. Bio-diesel, Fly Ash aggregates / building blocks, Solar cells, etc. are some examples of current developments. 8. Visit National and International Trade Fairs: Trade Development Authority of India and various Industries Associations would be able to give details of such fairs. They provide excellent opportunities to track latest products and developments in various industries. Hanover, Leipzig are some examples of good international trade fairs. Similar trade fairs are held in Delhi and Mumbai also. Some of these fairs are specialized too e.g. Machine Tools trade fair held in Godrej Compound in Mumbai, Electronics Trade Fair in Leipzig, etc. 9. Study international practices: You can draw useful clues from the consumption trends or practices in foreign countries and identify such goods as could become a craze in India!! Automatic vending machines, ATMs of banks, Retails outlets / departmental stores, Fast Food joints, Theme Parks, Ready Mix Concrete, Cement Blocks, Tissue Paper, etc. are good examples of such projects. 10. Study the possibilities of acquiring sick units : You can explore the possibility of reviving a sick unit – one which could be a stand-alone unit or provide synergies of operations or could form a forward or backward linkage for your existing unit. Examples: Downstream steel or Aluminum products, Multi Layered Plastic Fuel Tanks for existing auto ancillary unit, Screening of project ideas Having identified a number of project ideas using different methods, it is necessary to screen them for short-listing those, which will be most attractive / suitable for your company. This preliminary screening could be done by eliminating ideas which are not acceptable on primafacie considerations such as: ? Compatibility with the promoter (e.g. cigarette or beer manufacturing in the Gulf) ? Availability of the inputs (finance/technology/utilities/raw materials). ? Market (Is it adequate to justify a viable capacity?) ? Likely cost of production ? Risks involved ? Government directives / priorities (licence/national goals/environmental effects/foreign exchange) ? Any other important criteria Encouraging free flow of ideas: Provide conducive work environment, Develop sense of belonging, Tap creativity of existing employees, Reward entrepreneurial creativity, Use suggestion schemes to motivate employees. Create a diversification cell Encourage participation in seminars / workshops / exhibitions, Use consumer ingenuity, Hire experts / consultants, etc.
SWOT Analysis It is an exercise to assess the Strengths and Weaknesses of the organization and then based on these perceived attributes identify Opportunities available to it in the existing Business Environment while keeping in view the Threats that may challenge its own existence. This has to be a conscious and systematic effort by an organization to identify opportunities, which are synergic to its existing activities and SWOT analysis should be done periodically. Strengths and Weaknesses are identified through Corporate Appraisal while the opportunities and Threats also require scanning of environment Corporate appraisal Pragmatic approach to assessment of corporate strengths and weaknesses is very important for identification of investment opportunities. Important areas and aspects, which need to be considered for corporate appraisal are: (MPDCF) ? Marketing and Distribution ? Production Activities ? Research & Development ? Corporate Resources & Manpower ? Finance & Accounting Marketing and Distribution Image of the company in the market Product Mix and possibility of launching allied products (Aluminum) Market Share Distribution Network (LIC & P & T) Customer Loyalty Marketing and Distribution strategies and costs Production Activities Present Capacity and condition of Plant and Machinery (Can new products be considered?) Availability of raw materials, utilities, ancillary products, etc. (Are forward or backward linkages possible?) Degree of vertical integration Location advantages Cost of production of various products Research & Development Current Infrastructure for research activities and company’s capabilities. (Reddy’s Lab.) History / Track record of the company regarding new product developments & launch Coordination between production operations and R & D activities Corporate Resources & Manpower Rapport / clout with Government and Regulatory Authorities Corporate Image (HLL, ITC) Top Management and its capabilities / contacts / image / dynamism Skill sets / competence and commitment of existing employees Current state of industrial relations (BALCO)
Finance & Accounting Present financial position of the company ? Cost of capital ? Current position with regards to internal financial resources, Cash flows and liquidity etc. ? tax liabilities, ? Current Accounting & control systems Financial leverage possible and hence fund raising capacity of the firm (What could be the investment limits for the company?)
Organizational priorities…. While undertaking SWOT analysis priorities of the organization should be very clear. Approach should be systematic and not haphazard. Operational objectives of a company may be one / more of the following: ? Expansion of existing activities ? Improving productivity ? Achieving Cost reduction ? Increasing capacity utilization ? Improving profit margins ? Diversifying into allied / different fields.
Scanning the environment After undertaking internal assessment / SWOT analysis, it is necessary to study the external factors which constitute the Business Environment. Business environment is a set of Political, Economic, Social and Technological (PEST) forces that are largely outside the control and influence of a business. These can potentially have both a positive and a negative impact on the business. Apart from these, there are three other important factors viz. Competition, Availability / Supply and Geography, which form a part of the Business Environment and should be taken into account while searching for new project ideas. Political environment / government sector Political stability in the country (Type of Political System / Rule) (Iran, Iraq, Afghanistan, etc. Are not conducive for investment) Industrial Policy Subsidies, Incentives and any other concessions. Legal Environment (Taxation Laws, Company Laws, etc..) Import and Export Policies (ECGC, EXIM Bank, Applicable Tariffs, etc.) Financing Norms, Debt policies, etc. Infrastructure of Financial Institutions, Commercial Banks, their approach to lending, etc. Economic environment State of the economy: ? Overall Growth (GDP, GNP, Rate of inflation; level of capital investments; FDI, State of financial markets (cost of capital); and Exchange rates)
? Per capita income / Increase in disposable income. ? Growth Rate of primary, secondary and tertiary sectors ? Position of international trade / Trade surplus / deficit ? Openness / linkage with international economy (WTO) Social environment and demography Trends in population growth. Shifts if any, in age of population (Retail boom). Sex ratio, family profiles and employment of women (Increase in per capita disposable incomes). Educational Development. Distribution of income, growth in per capita income. Extent of urbanization. Investment and consumption patterns / habits in the society at large. Technology trends Emerging new technologies in the industry sector/s in which one operates (e.g. Electronics, Telecom, Software, etc.). Access to new technologies, foreign or indigenous technical know – how (e.g. Aramid Fibers, cryogenic engines). Adaptability of new technologies by the industry and consumer reaction. Competition How many competitors do you have? How do they compare in size, market share and strategy? Are new competitors entering the market? Who are they? Where are they from? What is the market's growth potential? Market homogeneity and differentiation in products: ? What is the market segmentation of your customer base (e.g. purchasing habits and preferences)? ? Why do your customers buy from you and not from your competitors? ? Can you list your key competitors in each market that you compete in? ? Can you demonstrate how your company differentiates itself from your competitors? Are there any entry barriers? Are there any substitutes? How do they compare in terms of quality, price, appeal, functional performance and availability? E.g. High Fructose Syrup Marketing Policies and practices ? Pricing of products (Is your price competitive? How did you arrive at your price structure?) ? How do you get your products and services to your end users? (Packing, sales & distribution) ? How will your operations be better than those of your competitors? Supply / availability of key inputs Availability of key raw materials (or sub-assemblies / ancillary products) and
their costs. Availability of trained manpower and costs thereof Availability and cost of utilities like power and water Availability of Finance / Funds and interest or costs thereof Geography Climatic conditions at chosen location (e.g. Humidity & Textile industry) Nearness to sources of raw materials and other supplies (e.g. Alumina production or Aluminum Smelting ) Nearness to markets (e.g. Heavy Industries) Incentives available from Government
PORTER MODEL
Michael Porter felt that the profit potential of an industry depends on various factors such as: ? Threat of new entrants ? Rivalry among existing firms ? Pressure from substitute products ? Bargaining power of buyers ? Bargaining power of sellers Potential Entrants
Suppliers
Bargaining power of suppliers
Threat of new THE INDUSTRY entrants Rivalry among existing firms
Users / Buyers Bargaining power of users
Threat of substitute products Substitutes
Threat from new entrants Additional capacity and hence competition may imply reduction in prices and hence lower margins and lower profitability. Threat from new entrants would be low if there are entry barriers for new units such as: ? The new ventures have to invest substantial resources to enter a particular industry / sector (while old units have made comparatively lower investments for similar capacities) ? Existing units have economies of scale and have depreciated their plant and machinery ? Existing companies have well established sales and distribution networks and control them. At least some of them command brand image, customer loyalty and many of them have
considerable experience in the field. ? Government policy may not encourage or even prevent new entrants ? For existing customers, the cost of switching from one supplier of products to another may be very high (e.g. Machine Tools) Threat from substitute products Substitute products imply more competition!! Severity of the competition would depend on various factors such as: ? Price competitiveness of the substitute (High Fructose Syrup V/S Sugar). ? Quality aspects (Paper v/s plastic coated paper). ? Ease with which the users can switch over to substitute products and costs thereof. ? Existing profitability of the sector which is producing the substitute vis-à-vis the original product Bargaining Power of users / Buyers Buyers can decide the fate of the firm if it is in “Buyers’ Market”!! They can bargain for price cuts, quality improvement and thus encourage competition for their own benefit. They can cut the profit margins of the firm. Buyers can be really effective in bargaining hard if: ? Their purchases are much higher than what the firm can produce and supply (i.e. they have a choice of other / alternative suppliers) e.g. non-precision autocomponents ? It is relatively easy for them to switch over to other suppliers / substitutes and costs thereof are marginal. ? They themselves can produce the product (backward integration). Bargaining Power of Suppliers Suppliers too can bargain hard for better prices. They can also compromise on quality and cut down on services if they are in “Sellers’ Market”. They would yield considerable bargaining power particularly if: ? There are very few suppliers in the market and buyers are many. (e.g. cooking gas, alumina) ? No substitutes are available (alumina for Al smelters) ? The buyers cannot easily switchover to other suppliers and costs of such a switchover are prohibitive (Machine Tools). ? Suppliers themselves can get into the field with forward integration!!
Project analysis and appraisal
Financial Institutions Promoters Factors to be studied: Market Appraisal Technical Appraisal Location Analysis Financial Appraisal / Viability Other considerations including Social Cost Benefit Analysis
PART I : Market analysis
First Step in project analysis or appraisal. ? What is the potential size of the market? ? What share of the market can you capture? Market analysis would involve: ? Preliminary Analysis and Defining objectives Product characteristics / usage / applications (Who are the buyers?) Approximate Market size and characteristics (Existing Mfrs., Sales in the past, etc.). Market segments (diff. ratings & types) & geographic distribution Pricing, packaging, Quality aspects, Guarantee / Warrantee, distribution channels, etc. ? Collection of secondary data usually from desk research Basically refers to desk research. Available published information Internet is a powerful tool – websites of concerned associations, manufacturers, dealers, Government Agencies, Regulatory Authorities, etc. provide good amount of secondary data. ? Market survey / Field Survey Aims at collecting primary information It is usually a sample survey and not a census survey. In a sample survey only a part / representative sample is contacted and relevant data collected to extrapolate for drawing conclusions. Census survey is possible only if the entire population to be covered is small / manageable ? Characterization of the market A typical good MS report should cover the following information: Product description, specifications, applications / uses / usage pattern or norms Characteristics of the market: Demand: - Past and the present demand (production + imports – exports) - Breakdown of demand according to different user segments and geographies, nature of product (sub-classification e.g. steel or aluminum) - Price trends ( Five years’ data, FOB, CIF, Wholesale, Retail) - Selling and distribution methods adopted in the industry, - Advertising and promotional methods adopted in the industry - Consumer profiles: Industrial consumers / domestic consumers Demographic & sociological such as age, sex, income, profession, social background, etc. Geographic division Attitudinal such as preferences, habits, attitudes, etc. Supply: - Existing suppliers (Foreign or local) Present installed capacity Trend in Capacity utilization & production Expansion plans, if any Quality of products Major problems faced by them in the past, if any Threats from substitute products, if any.
- Likely new entrants in the field. Scope: Gap in the demand for and supply of chosen product or services, Likely share of the market that one can expect to achieve. Recommended marketing strategy. Government policy: Can change the total perspective / picture completely!! Controls on trade, taxes, duties, subsidies, etc.
? Forecasting Demand & Supply and assessing the gap I. Qualitative Methods: Delphi method : Opinions of managers in the field sought through a questionnaire and summary of consolidated findings prepared and sent to them again and again till reasonable agreement emerges. Jury of executive method: Opinions of a group of successful managers sought on likely sales in the future and these figures are then simply consolidated II. Time Series Projection Methods: Trend projection method: i. First a trend is determined by establishing a relationship between demand and supply based on past consumption statistics ii. Next, this equation / relationship is used to extrapolate the trend and estimate the demand for the future. Where, Y = Demand X = Time variable
Instead of linear relationship, you could also have: ? Exponential Relationship Y= a ebx ? Polynomial Relationship Y= a0 +a1X+a2X2+a3X3+----+anXn ? Cobb Douglas Relationship Y= aXb III. Other methods: ? End Use Method ? Consumption Level Method ? Leading Indicator Method ? Chain Ratio Method ? Econometric Method ? Preparing a complete market plan
PART II -TECHNICAL ANALYSIS
Comes under the domain of technical or engineering experts.
Basically involves technical appraisal of given project. BASIC PARAMETERS Plant capacity Plant capacity has to be decided only after careful consideration of following aspects: Economies of scale / Technology requirement (Aluminum smelter or cement plant) Input constraints Investment costs: C1= C2 (Q1/Q2)? Market Potential Resources at the disposal of the firm Government Policy Product Mix Is guided by market forces Should be aimed at maximizing the profits e.g. soap manufacturing. Production facilities should be planned to allow flexibility in product mix to adjust to changing market conditions. Appropriate trade off between additional investment and flexibility in product mix is necessary Manufacturing Process / Technology For many products, two or three alternative processes are available: DMT versus PTA route for the manufacture of polyester or PET is a well known controversy. Steel: Blast furnace, Electric Arc Furnace Route Dry process versus wet process for portland cement manufacturing. Solvent extraction plants could use batch process or continuous process, Refining could be mechanical refining or chemical refining. Bio-diesel could be produced from vegetable edible or non-edible oils Technical arrangements Appropriate arrangements for technical know how for the manufacturing process are prerequisites for a successful operation. Technical collaboration, if necessary, should consider: 1. Project and process designing, technical inputs, selection of equipment, installation, commissioning, maintenance contract, training of personnel, etc. 2. Period of collaboration, 3. Terms and conditions of collaboration viz. lumpsum payment, licensing fee and / or royalty, 4. Process and performance guarantees wrt capacity, process parameters, consumption of raw materials, utilities, etc. – penalty clauses 5. A clause for continuous updating of know-how, benefits of R & D work, 6. Use of brand names, export assistance or restrictions if any, 7. Participation in equity, 8. Assignment of responsibilities in case of change of ownership, 9. Termination of agreement and dispute mechanism, 10. Clauses applicable in case of force majeure Materials and inputs Advance and meticulous planning is required for procurement of right quality / specifications & quantities of: Raw materials (Agricultural, Marine, Mineral, Livestock, Forest Products, etc.) Utilities
Processed industrial materials, components, Auxiliary materials / consumables and factory supplies, etc. CAN FORWARD CONTRACTS BE ENTERED INTO? Location and site. Proximity to suppliers of raw materials and markets Proximity to ancillary units Availability of Infrastructure Labor situation Government policies and incentives Other factors SITE SELECTION IS ALSO IMPORTANT! EXAMPLE: GRANITE FACILITY
Environmental aspects These aspects are assuming more importance in the field of project management with increased awareness of our responsibilities for a pollution free environment. Pollution could be: Noise, solid or gaseous emissions into the air, Liquid discharge, heat and vibrations, etc. Identify the sources of pollution, assess the quantum of pollution and plan the mitigation measures well in advance. It is a good idea to conduct “Environmental Impact Assessment (EIA)” study if the project is likely to result into any environmental damage and take effective steps to mitigate it. Ensuring environmental clearances by meeting all statutory requirements is a step in the right direction. Leather, paper, textiles, cement, steel, coal based thermal power stations, granite processing facilities and chemical industries must plan for environmental measures well in advance.
Civil works and structures Site preparation and development (grading & leveling, roads, fencing / boundary walls, connections for utilities, pipelines, cabling, drainage, etc. within battery limits.) Buildings and Structures (Administrative, Factory & Auxiliary buildings like storage, warehouses, Residential, Canteen, Medical, Prayer rooms, etc.) Work outside the battery limits of the plant: supply and distribution of utilities, effluent disposal, transportation arrangements, etc.
Machinery and Equipment Choice depends on the technology used and the designed capacity of the plant. Capacities of different sections should match (Detailed calculations are required to decide on configurations of machinery / process equipment, estimate of likely levels of production, type of machine operations, production hours required for each operation and hence machine, number of machines required and provision for emergencies, etc.). Equipment could be of different types: Process, mechanical, electrical, instrumentation & process control equipment, internal transportation (cranes, lift trucks, etc.) List of maintenance equipment, quality control laboratory, spare parts and tools required. Constraints on selection of plant and machinery (availability of power, large size equipment and hence difficulty in transportation, shortage of skilled labor, etc.) Coordination for procurement of plant and machinery: Different items from different
suppliers, Turn-key project v/s in-house responsibility of packaged contracts, Factors to be considered while making a choice of supplier/s (reputation, quality, delivery schedules, terms of payment, Performance Guarantees (mechanical, input and output), and rewards or penalties related to period of completion. Plant layout & project charts Functional Layout Plant Layout (smooth flow of raw materials, proper utilization of space, provision for expansion, safety of personnel, minimizing movements and hence production costs) Flow process chart and Material Flow Diagram (ideally, balance of material at every stage should also be mentioned). Production Line Diagram Utility Line Diagrams and Consumption Layout, Transport Layout Communication Layout Organization Chart
Project implementation schedule For smaller projects, a simple bar chart showing different activities and timing is adequate. Work Schedule: Detailed work plan of at least initial activities is however desirable. For complex projects, it is necessary to prepare PERT / CPM charts. Financial Institutions now a days insist on network techniques to know the schedule of implementation. The topic is separately dealt with in great details.
Considering alternatives. Nature of project: make or buy decisions Production process (solvent extraction) Product quality (footwear, textiles) Scale of operation and phasing of operations (Aluminum smelter) Location (Single plant or multiple locations)
ESTIMATING PROJECT COSTS
Tools & techniques for cost estimation 1. ANALOGOUS ESTIMATING: Also known as top-down estimating. • • • • Uses actual cost of previous, similar project as a basis for estimating total cost of current project. Used in early phases when detail information on project is not available. Generally, a quick & less accurate technique, but also less costly It is most reliable when a. Previous project is similar in fact & b. Individuals / group preparing budgets have the needed expertise
2. PARAMETRIC MODELING:
• Uses project characteristics (Parameters) in a mathematical model to predict project
•
costs. Cost and reliability of the model highly depends upon a. Accuracy of historical information used to develop the model b. Easy quantifiability of parameters used c. Scalability of the model for large and small projects
3. BOTTOM-UP ESTIMATING:
Uses estimates of costs for individual work items to be summarized or rolled-up to get total project estimate. • Cost and accuracy depends on a. Size of individual work item: smaller work items increase both the cost and accuracy. b. Project management team has to weigh additional accuracy against additional cost 4. COMPUTERISED ESTIMATION TOOLS: • • Computerised tools such as Project Management software and spreadsheets are widely used to assist cost estimation Such products simplify the use of tools mentioned earlier and thereby facilitate rapid consideration of many costing alternatives.
•
ELEMENTS OF PROJECT COST Land & site development Cost of acquisition of land (basic cost, cost of conveyance, stamp duty, etc.) (Extra land acquired but not meant for the project is not considered) Premium paid on leasehold land & conveyance charges paid. (Lease Rent?) Cost of site development: Leveling, Approach roads, Internal Roads, Fencing, Gates, etc. Cost of tube wells. Buildings & civil works Factory building Administrative building Auxiliary buildings housing utilities’ equipment, warehousing / storage house, etc. Non-factory buildings: Residential buildings / staff quarters, canteen, guest house, watch & ward, time office, compound wall / fencing, etc. Places of prayer, Silos, tanks, garages, etc. Drainage, sewerage system, etc. Any other civil work including special foundations, podiums, etc. Architect’s fees Plant and machinery Cost of indigenous machinery (FOR value + sales tax, Octroi, other taxes and transportation cost to the site) Cost of imported machinery (FOB value, shipping charges, local transportation costs, cost of insurance, clearing, loading & unloading and import duty) Cost of stores & spares Foundation and installation charges For financial appraisal, FIs normally insist on three latest quotes and allow for a provision for inflation, foreign currency rate fluctuation, etc. if not separately provided in provision for
contingencies Technical know-how & engg. Fees, expenses on foreign technicians & training of project personnel abroad Fees of consultants, collaborators, etc. for: ? Assistance on technical matters e.g. Project Report, selection of process / technology, plant and machinery, detailed project engineering, supervision during installation and commissioning, etc. ? Expenses on foreign technicians and on training of Indian technicians abroad (all expenses). ? Recurring payment of royalty does not form a part of the project cost; it is treated as operating expense. Miscellaneous fixed assets Assets, which are not a direct part of the manufacturing process. - Furniture and fixtures, - Office equipment and machines, - Vehicles, - D.G. sets, Transformers, Switchgear, boilers, piping systems, workshop and quality control / laboratory equipment, - Investment in effluent treatment plants, - Lump sum payments for trade marks, licenses, copyrights, deposits paid to Electricity Boards, etc. Preliminary expenses Expenses incurred on identification of the project, market survey, Techno-Economic Feasibility Report, drafting of Memorandum and Articles of Association for the company, Incorporating and registering of the company, Legal charges, etc.. Expenses incurred on capital issues by the company such as underwriting commission, brokerage, fees to registrars of issue, managers to the issue, printing, publishing prospectus, advertising, listing fees, stamp duty, etc. Pre-operative expenses Expenses incurred on the following till the start of the commercial production: ? Interest on borrowed funds during the implementation period, commitment charges, etc. ? Establishment expenses e.g. rent paid, traveling expenses, insurance charges, mortgage expenses, etc. ? Trial production or start up expenses. ? Miscellaneous expenses Pre-operative expenses can be apportioned to fixed assets on some acceptable basis. The firm may also treat them as deferred revenue expenditure and write them off over a period of time. Provision for contingencies This is a provision for unforeseen expenses: ? Inflation, ? Exchange Rate risks, ? Delay in execution and hence escalation of costs ? Any other miscellaneous costs / liabilities that may arise. Normal provision is 5% of firm costs and 10% for non-firm costs, though this may vary depending on the size and nature of the project.
Margin money for working capital Banks normally provide finance / credit facilities for meeting requirements of working capital. A part of this is to be brought in by the promoters basically from long term sources of finance. This is a critical element of project cost particularly if there are over-runs in the cost. FIs normally block an amount equivalent of the margin money from the term loans till the project is complete. Initial cash losses, if applicable Most of the promoters do not show these as a part of the project cost. Prudence however calls for making such a provision if there are any initial losses since they could affect the liquidity position of the company.
PROJECT FINANCING Project financing is a special case of financing in which lenders have to rely on repayment from the net cash flow generated by the project. Project finance is usually provided against assets of and the rights in a particular project rather than against the borrower’s balance sheet, though Net worth of the promoters is also important. Financers are therefore concerned with the analysis of the risks associated with the project before they accept the investment opportunity which it represents. The cost and terms of financing therefore reflect the financier’s view about the risks involved in implementing the project. Need for project financing For companies in general, to enhance their investment limits. To spread the risk among several parties to lessen adverse financial impact if any, and to increase their capacity to undertake more projects. For multinational corporations to protect their corporate balance sheets from the impact of large projects For governments to share the costs and risks of exploiting natural resources For governments to increase foreign capital investment in the country at no cost to the country. Financing strategy The project will fail, no matter what is its technical merit, unless enough finance is made available to complete it. The design, implementation and management of project financing demands the same level of commitment from the promoters as the rest of the project management activities. Financial planning should begin at the same time, or in some cases even earlier than the technical project planning. While financing package is likely to reflect the complexity of the project, finance has some inherent characteristics, which themselves add to the complexity of undertaking. SOURCES OF FINANCE Identifying sources of finance Identifying suitable sources of finance is the first step in planning finance for a project. Finance for projects falls into two major categories viz.
DEBT AND EQUITY Debt: Borrower has the obligation to repay. Debt also usually carries obligation to pay interest and to adhere to a prearranged repayment schedule. The lender has priority claim if borrower goes into liquidation The main sources of debt finance are: Commercial banks Multilateral lending institutions Suppliers of equipment & services for the project Suppliers of raw materials to the project Buyers of output from the project
Equity: Funds subscribed by the shareholders from their own resources. Equity has no maturity date. No obligation to pay dividend or no need of repayment. If cash surplus is not sufficient, dividends can be skipped!! Higher the equity, greater is the leverage to raise debts. Investors tend to loose their money if the project fails to perform. Equity shareholders have the last claim if the project goes into liquidation. Sale of equity shares can dilute the control of the owners. Cost of equity is usually high. Dividends are paid from PAT while interest payments are tax deductible expenses. Cost of raising equity is very high The main sources of equity finance are: Internal: Corporate cash flow generated by existing business operations Public: Corporate or individual investors, or funds raised through stock markets Joint venture partners Government subscriptions & aids Multilateral investment institutions *Venture capitalists EQUITY V/S DEBT
LEASING V/S HIRE PURCHASE
1) Share Capital (Equity & Preference)- (dividend, claim, control, tax) 2) Term Loans (Secured Borrowings) – major source of finance ? Rupee or Foreign Currency Term Loan Financial Institutions are the primary sources for term loans. Term Loans are normally payable in less than ten years. Usually there is a moratorium of two years and repayment is made in five to seven years. Repayment of principal is in terms of equated semi-annual or quarterly installments. Term loans are used to finance purchase of fixed assets and margin money only. 3) Incentives (Capital subsidy or seed capital, tax deferment or exemption) 4) Debenture Capital (Debt instruments: convertible or non-convertible, more flexible than term loans) 5) Deferred Credit (usually offered by suppliers of plant and machinery – interest and phased payment conditions vary – bank guarantees are required) 6) Other sources (unsecured loans by promoters, lease or hire-purchase programs, Public deposits, etc.) 7) Raising capital in international markets: Eurocurrency Loan: External Commercial Borrowings, raising capital in a global market: 1. 2. 3. 4. 5. These are syndicated loans. Syndication fee payable to lead bank. Rate of interest is a floating rate usually linked to LIBOR or SIBOR Tenor of up to 10 years is possible Multi currency option is possible Repayable in installments.
Global Depository Receipts: Indirect equity investment - Shares issued by a firm are held by a Depository (International Bank like Bank of New York), which receives dividends, reports, etc. and issues claims. Each receipt is a claim on specific number of shares. 1. GDRs are denominated in a convertible currency 2. GDRs may be listed on major stock exchanges 3. Issuer firm pays dividends in home currency. 4. Issuer firm can thus avoid listing procedures, disclosures, etc. 5. 8) Uunconventional sources of project financing: Leasing & Hire Purchase: Use of project assets through off-balance sheet financing. Forfaiting: Sale of financial instruments due to mature in future. Counter-Trade: Seller accepts goods or services in lieu of cash payments. Switch Trading: Making use, via a third party, of un-cleared credit surpluses arising from bilateral trade agreements. Offset: Exporter of technically advanced project incorporates an agreed value of materials, equipment & services supplied by the buyer. Factoring: SBI and Canara Bank are factors. Factor selects accounts of clients and establishes along with the client the credit limits. The factor takes the responsibility of collecting the debt accounts. The factor can advance money to the client against not
yet collected or not yet due loans. Factoring can be on recourse basis (risk of credit is born by the client) or non-recourse basis. Franchise Financing: Engineering, Procurement & Construction (EPC) contractors become equity holding joint venture partners for the project they design & build. Debt/Equity Swapping: Multinational technology owner buys host country debt at a discount. The debt is redeemed in local currency at favorable rate of exchange for setting up a local company. The local company uses transferred technology to earn foreign exchange, replace imports & generate local employment. Build – Own - Operate – Transfer (BOOT): Government grants concession to a project company (SPV) to build a facility and operate it on commercial basis. Facility is transferred to the government at the end of the concession. This type of finance arrangement is usually used for infrastructure projects.
FINANCIAL APPRAISAL BY FINANCIAL INSTITUTIONS:
Justification of estimate of cost of capital Justification for estimate of working capital Adequacy of Rate of Return: ? IRR: should be 3 to 5 % more than WACC and not less than 15% ? DSCR: 1.5 to 2.0 or more ? ROI: should be ideally 15% or more Justification of Debt:Equity Ratio ? Should be 1.5:1 ? Debt should be adequately covered by investment in immovable fixed assets ? Stock Exchange regulations are to be met in case of listing. ? Promoters should contribute a certain minimum percentage of the project cost ? Means and capacity of the promoters to contribute to a reasonable share of the project cost
Project manager His responsibility is to plan, organize, direct and integrate work efforts of all participants to achieve the set project goals (costs, time schedules and scope goals). One person in the organization who is accountable for the project and is totally dedicated to achieving its goals. Leadership qualities are essential. Duties of project manager :As a resource manager: manage and direct project resources to achieve the project objectives. (men, money, material, machines, etc.) As a planning & control manager: develop the project plan and ensure that the work is completed on time, within budget and with acceptable quality. As a co-ordinator: interface with higher management regarding project review, approvals and addressing project issues. These must also relate successfully to line managers and staff. Directing Motivating Planning Supervising : : : project resources project team anticipate and plan : the project work
Administering Doing Training Counseling Delegating Resolving conflict Project team
: : :
: administrative tasks : doing some tasks directly project team : technical, business, project & personal issues delegate & supervise over resources and schedules
Project work is team work. Project work is accomplished by a group of people from different functional areas and organizations. Size and composition of the team will vary depending on the project requirements. The team may be disbanded after the project work is completed. Project management v/s general management
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Project approach has long been the style of doing business or implementing or undertaking tasks – particularly in construction industry. In 1917 Henry Gantt developed the Gantt chart as a tool for scheduling work in job shops. Modern project management began with the Manhattan Project, which the U.S. military led to develop the atomic bomb In 1958, US Navy developed PERT charts In the 1970s, the military began using project management software, as did the construction industry. By the 1990s, virtually every industry was using some form of project management
Project management
“The whole discipline and art of project management is going to be an essence of management training, operational excellence and value added.” - Tom Peters Project management is the discipline of planning, organizing, securing and managing resources to bring about the successful completion of specific project goals and objectives. It is sometimes conflated with program management, however technically that is actually a higher level construction: a group of related and somehow interdependent engineering projects. The application of modern management techniques and systems to the execution of a project from start to finish, to achieve predetermined objectives of scope, quality, time and cost, to the equal satisfaction of those involved. Project management is the process by which projects are defined, planned, monitored, controlled and delivered such that the agreed benefits are realised. Projects are unique, transient endeavors undertaken to achieve a desired outcome. Project management is the discipline of planning, organizing, and managing resources to bring about the successful completion of specific project goals and objectives Webster’s dictionary: A proposal of something to be done, Plan; scheme, an undertaking; specific task, A special unit of work, research, etc. as in school, a laboratory, etc. An extensive public undertaking, as in conservation, construction, etc.
What is project
A project is a temporary endeavor undertaken to accomplish a unique purpose A project is a carefully defined set of activities that use resources (money, men, materials, machines, energy, provisions, communication, etc.) to meet the pre-defined objectives. Characteristic features of major projects: • • • Projects are usually very large & capital intensive They are often dedicated to a single purpose & none of the equipments can be used for other purpose Time for project development & implementation is quite long, returns are deferred for some
years
• • • •
They are often located at remote sites demanding additional unproductive investment in infrastructure They often exceed capacity of a single organization to plan, supply & construct They are technically complex demanding resources of skill, manufacturing & production which are not easily or widely available Their functions often overflow national boundaries and their products have international impact
Attributes of projects Unique definable single purpose. Temporary, one time activity, never to be exactly repeated. Require resources, often from various areas. Teams are formed for a purpose and disbanded after achieving the purpose. Projects cut across the organizational lines; many disciplines are involved. Should have a primary sponsor and/or customer / stake holder/s Involve uncertainty and unfamiliarity, does not fall under the “routine” category of activity Project is the process of working to achieve a pre-defined goal and during the process, the project may pass through various phases Examples Pyramid of egypt (2500 b.c. 2.3 mn. Stone blocks weighing 2 to 70 tons each, quarried and carried over the niles, height equivalent of 40 storey building, 13 acres of land, deviation of less than an inch in levels, stones fixed with accuracy of .04 inch!!) 100,000 laborers, 40,000 skilled masons, over 150,000 women & children to be housed & fed! Numerous other examples like taj mahal, eiffel tower, international space station by nasa, anti missile system developed by india, etc. From construction, information technology to research, projects could be conceived in all possible fields. Each project is unique in many ways. At corporate level: - restructuring - relocation / diversification (new plant) or expansion - acquisition / merger - new product or system development At family / personal level: - remodeling of a home - wedding in a family - moving to another house Most artistic endeavours are projects!! (taj mahal, statue of liberty, eiffel tower, etc.) Saving human life in the event of natural calamities / disasters is also a project. (earthquake in gujarat or maharashtra, tsunami, chernobyl, etc.). Social uplift programs, family planning, aids control, etc. Types of projects Manufacturing Projects Designed or built to order machines /equipment New product development projects Infrastructure projects
Greenfield Projects Establish buildings or operating plants at remote sites Completely new projects Scientific Research Projects Innovative, experimental, developmental System development Projects Systems / software development & implementation Management Projects Managing change within organization Exceptions….. Building a skyscraper is a project; but mass construction of pre-fabricated homes is a scheduled and repetitive task rather than a project. Repetitive work of accounts and audits is not a project. Exploratory mission to Mars or Moon are projects; conducted tours to tourist places are not projects. The Triple Constraint Every project is constrained in different ways by its Scope goals: Quantity & Quality Time goals Cost goals It is the project manager’s duty to balance these three often competing goals. The Project Management Triangle The discipline of project management is about providing the tools and techniques that enable the project team (not just the project manager) to organize their work to meet these constraints.
What is Project Management? Today, the definition of a project is no more confined to engineering, technology and research; But has expanded to include various fields / situations, one time crisis, and dealing with difficult issues. It has been realised that the solution to majority of corporate problems involves obtaining better control and optimum use of existing corporate resources. Project Management is one of the techniques being considered. Project management is being used by a wide range of disciplines and corporations that had never previously considered it as a viable method of performing work Legal offices, hospitals, banking and other services as well as traditional manufacturing firms are increasingly using project management to improve the delivery of their services or for creation of new products. Some typical examples are: ? Annual budgeting / auditing exercises ? Introduction of new systems (ISO 9000) ? Effecting change in structure, staffing, or style of Organization ? Software development & implementation ? Development of new product / Service Campaign for new product launch / election ? Organizing AGM / sales conference / event
Project management is “the application of knowledge, skills, tools, and techniques to project activities in order to meet or exceed stakeholder needs and expectations from a project” (PMI) *, Characteristics of projects Project can be described as a unique set of co-ordinated and inter-related activities undertaken by an organisation to meet defined objectives; that has an agreed start and finish time; is constrained by cost & resources and has specified performance requirements. Projects are unique in nature. Everything is special and “one-off”. Designs are new and usually unproven. Every industrial or commercial project is a risk venture. The job of the manager is to identify the risks and, through his project management, contain them. The application of techniques and management practices that have been developed will depend on the size and type of project, and upon the relative priorities, which are assigned to the cost, time and performance objectives. Project has a definite start and finish (Scope goals –quantity and quality and Time goals). Project consists of a well-defined and unique collection of jobs, activities, or tasks which when complete; mark the end of project. Project is constrained by cost, time & resources and has specified performance requirements. The jobs may be started or stopped independent of each other, within a overall given sequence. The jobs are ordered - i.e., they must be performed in technological order. Project Stakeholders Stakeholders are the people involved in or affected by project activities Stakeholders include The project sponsor or promoter, equity / share holders Project team, Support staff,
Customers / users, Suppliers / Vendors / Sub-contractors, Financial Institutions / lenders / bankers Govt. / Approving authorities Affected population / opponents to the project
Knowledge areas describe the key competencies that project managers must develop
Four core knowledge areas lead to specific project objectives (scope, time, cost, and quantity / quality) Four facilitating knowledge areas are the means through which the project objectives are achieved (human resources, communication, risk, and procurement management) One knowledge area (project integration management) affects and is affected by all of the other knowledge areas
Project Management Tools and Techniques Project management tools and techniques assist project managers and their teams in various aspects of project management Some specific tools include Project Charter and Work Breakdown Structure - WBS (scope) Gantt charts, PERT charts, critical path analysis (time) Cost estimates and Earned Value Analysis (cost) Advantages of Project Management Bosses, customers, and other stakeholders do not like surprises. Good project management (PM) provides assurance and reduces risk. PM provides the tools and environment to plan, monitor, track, and manage schedules, resources, costs, and quality. PM provides a history or metrics base for future planning as well as good documentation. Project members learn and grow by working in a cross-functional team environment
Where is pm appropriate? Five general criteria are: 1. Unfamiliarity: major overhaul and not minor changes.
2. 3. 4. 5.
Magnitude of the effort: substantially more resources required. Changing environment: high-tech industries Interrelatedness: when a joint effort is required. Reputation of the organization: in cases where the risk of financial ruin / loss (market share) is high.
Where is pm not appropriate? Cases not coming under any of the five criteria mentioned earlier. Standardized activities Routine work Projects are shaped by their environment u u u u u u u u u u Time Technology Cultural system Social system Political system Regulatory and legal system Economic system Organisational system. Resources, Budgets,
Current project environment Increasing global competition Rapid technological change Rapid product obsolescence rate Organisational downsizing Business re-engineering Empowerment Focus on quality & continuous improvement Information deluge Faster communication Inter-organisational systems Impact of current project environment on organizations • • • • Projects are given more importance by the management for survival of the organization Increasing need felt to do projects right & successful the first time More limitations on resources and lesser organisational support Increasing pressure on project management to achieve quick results
Impact of current environment on projects • • • Projects are tending to get more & more complex & large to handle Projects to be completed ahead of schedule, always. Need more flexibility in defining scope, planning & execution to expand project benefits and
impact
Different stages of a project PROJECT MANAGEMENT
PROJECT PLANNING INVESTME NT DECISION IDEA GENERATI ON FEASIBILIT Y& APPRAISAL Market • Technical • Financial • Economic • Ecological •
PROJECT IMPLEMENTATION SCOPE DEFINITIO N PROJECT ENVIRONME NT RISK ASSESSME NT Sensitivity • Scenario • Simulation • Decision • tree PROJECT SCHEDULI NG GANTT CHART S
PROJECT CLOSURE PROJECT BUDGETING
NETWORK TECHNIQU ES PERT • CPM • CRITICAL • CHAIN
Specifications •
Deliverables • Time frame Activity based • • costing Organization • Cost breakdown • Budgets • Cash flow WBS / CBS • • Earned value •
PROJECT IDENTIFICATION Identification of investment opportunities Most important and first step towards establishing a successful project / venture. Project has to come before project management starts !!! Identifying right business to get into at the right time is an important - albeit difficult task. It calls for “fertile” imagination, sensitivity to changes in environment and realistic assessment of what the firm can do. Process of identification is “Objective” as also a “subjective” process!! Generation of project ideas We live in a world in which the ability of an organization to survive and grow is defined by its capacity to innovate – to identify propitious niches – almost on a continuous basis. Truly niche project ideas are very rare and are based on significant technological
breakthroughs or innovations, which may involve R & D on existing product lines to offer improved variants of existing products or services or entirely new products / services.
Think dynamic. Think different. Think big!!! True success lies in identifying a phenomenon before it becomes a trend!! Every organization should ideally undertake SWOT Analysis and scan the business environment almost on a continuous basis. How to scout for project ideas? 1. Study and analyze the performance of existing Industries: ? Growth and capacity utilization in the industry ? No. of units, Licensed and installed capacity and general performance (production) of the industry. ? Profitability of the existing units in the industry. ? Region-wise study would be essential for specific products 2. Forward and Backward Linkages: Study and analyze the inputs and outputs of existing industries. ? Backward linkages: Are the raw materials / sub-assemblies / other supplies procured from distant sources or imported? Can these be produced more economically locally? Can the companies make rather than buy some parts / components more economically? (Auto ancillary products) ? Forward linkages: Can the output of the existing industry be processed further to obtain value-added products? (Steel or Aluminum rolled products) Can the value addition be done on waste products also ? (e.g. Red Mud from Alumina producers or fly ash from coal based thermal power stations) 3. Review of imports and exports Study import and export statistics for the past five to six years to explore the possibility of import substitution or to set up export oriented units. Import substitution can achieve the following: ? Indigenization and hence bringing new technology to the country. ? Saving valuable foreign exchange and improving balance of payment position. ? Provide market for local products apart from 4. Study of local resources / raw materials Study of availability of local resources in the form of raw materials or skills is important for identifying project ideas based on them. (Examples: coal deposits for power plants, quartz for glass / glass products, Limestone for cement, Hops for beer or grapes for wine, etc. and artisan skills e.g. diamond cutting or jewelery, silk production, etc. Reports published by GSI, NCAER, etc. give useful information on resources and potential industries which can be started in different regions or at different locations. 5. Discussions with Financial Institutions, Lending or Development Agencies: State Financial Corporations, Industrial and Investment Corporations prepare comprehensive reports to attract investments to their states. These reports usually give very important information and hence viable project ideas to potential investors. Many times they engage professional consultants to conduct industrial potential studies for their respective states and prepare these reports. (World Bank, IDBI, ADB, SICOM, MSFC, Agro-Industries Dev. Corporations., etc.) 6. Study Government Guidelines and Plans / planned outlays: Central and State Governments prepare economic plans and budget outlays for different sectors of the economy (e.g. Five Year Plans). These give good idea of the projects that could be started for the future requirements of the Government or to meet the needs of the projects planned by them. (e.g. Sagar Mala, Commodity Exchanges, etc.) 7. Study New Technological Developments:
Many research agencies in India and abroad undertake research on new products and processes. It is useful to keep track of their work. Council of Scientific and Industrial Research Laboratories (CSIR), DRDL, NPL, CFTRI, TERI, Indian Council of Agriculture Research (ICAR), etc. These can be studied in details to look for possibilities of commercial deployment of the research work. Bio-diesel, Fly Ash aggregates / building blocks, Solar cells, etc. are some examples of current developments. 8. Visit National and International Trade Fairs: Trade Development Authority of India and various Industries Associations would be able to give details of such fairs. They provide excellent opportunities to track latest products and developments in various industries. Hanover, Leipzig are some examples of good international trade fairs. Similar trade fairs are held in Delhi and Mumbai also. Some of these fairs are specialized too e.g. Machine Tools trade fair held in Godrej Compound in Mumbai, Electronics Trade Fair in Leipzig, etc. 9. Study international practices: You can draw useful clues from the consumption trends or practices in foreign countries and identify such goods as could become a craze in India!! Automatic vending machines, ATMs of banks, Retails outlets / departmental stores, Fast Food joints, Theme Parks, Ready Mix Concrete, Cement Blocks, Tissue Paper, etc. are good examples of such projects. 10. Study the possibilities of acquiring sick units : You can explore the possibility of reviving a sick unit – one which could be a stand-alone unit or provide synergies of operations or could form a forward or backward linkage for your existing unit. Examples: Downstream steel or Aluminum products, Multi Layered Plastic Fuel Tanks for existing auto ancillary unit, Screening of project ideas Having identified a number of project ideas using different methods, it is necessary to screen them for short-listing those, which will be most attractive / suitable for your company. This preliminary screening could be done by eliminating ideas which are not acceptable on primafacie considerations such as: ? Compatibility with the promoter (e.g. cigarette or beer manufacturing in the Gulf) ? Availability of the inputs (finance/technology/utilities/raw materials). ? Market (Is it adequate to justify a viable capacity?) ? Likely cost of production ? Risks involved ? Government directives / priorities (licence/national goals/environmental effects/foreign exchange) ? Any other important criteria Encouraging free flow of ideas: Provide conducive work environment, Develop sense of belonging, Tap creativity of existing employees, Reward entrepreneurial creativity, Use suggestion schemes to motivate employees. Create a diversification cell Encourage participation in seminars / workshops / exhibitions, Use consumer ingenuity, Hire experts / consultants, etc.
SWOT Analysis It is an exercise to assess the Strengths and Weaknesses of the organization and then based on these perceived attributes identify Opportunities available to it in the existing Business Environment while keeping in view the Threats that may challenge its own existence. This has to be a conscious and systematic effort by an organization to identify opportunities, which are synergic to its existing activities and SWOT analysis should be done periodically. Strengths and Weaknesses are identified through Corporate Appraisal while the opportunities and Threats also require scanning of environment Corporate appraisal Pragmatic approach to assessment of corporate strengths and weaknesses is very important for identification of investment opportunities. Important areas and aspects, which need to be considered for corporate appraisal are: (MPDCF) ? Marketing and Distribution ? Production Activities ? Research & Development ? Corporate Resources & Manpower ? Finance & Accounting Marketing and Distribution Image of the company in the market Product Mix and possibility of launching allied products (Aluminum) Market Share Distribution Network (LIC & P & T) Customer Loyalty Marketing and Distribution strategies and costs Production Activities Present Capacity and condition of Plant and Machinery (Can new products be considered?) Availability of raw materials, utilities, ancillary products, etc. (Are forward or backward linkages possible?) Degree of vertical integration Location advantages Cost of production of various products Research & Development Current Infrastructure for research activities and company’s capabilities. (Reddy’s Lab.) History / Track record of the company regarding new product developments & launch Coordination between production operations and R & D activities Corporate Resources & Manpower Rapport / clout with Government and Regulatory Authorities Corporate Image (HLL, ITC) Top Management and its capabilities / contacts / image / dynamism Skill sets / competence and commitment of existing employees Current state of industrial relations (BALCO)
Finance & Accounting Present financial position of the company ? Cost of capital ? Current position with regards to internal financial resources, Cash flows and liquidity etc. ? tax liabilities, ? Current Accounting & control systems Financial leverage possible and hence fund raising capacity of the firm (What could be the investment limits for the company?)
Organizational priorities…. While undertaking SWOT analysis priorities of the organization should be very clear. Approach should be systematic and not haphazard. Operational objectives of a company may be one / more of the following: ? Expansion of existing activities ? Improving productivity ? Achieving Cost reduction ? Increasing capacity utilization ? Improving profit margins ? Diversifying into allied / different fields.
Scanning the environment After undertaking internal assessment / SWOT analysis, it is necessary to study the external factors which constitute the Business Environment. Business environment is a set of Political, Economic, Social and Technological (PEST) forces that are largely outside the control and influence of a business. These can potentially have both a positive and a negative impact on the business. Apart from these, there are three other important factors viz. Competition, Availability / Supply and Geography, which form a part of the Business Environment and should be taken into account while searching for new project ideas. Political environment / government sector Political stability in the country (Type of Political System / Rule) (Iran, Iraq, Afghanistan, etc. Are not conducive for investment) Industrial Policy Subsidies, Incentives and any other concessions. Legal Environment (Taxation Laws, Company Laws, etc..) Import and Export Policies (ECGC, EXIM Bank, Applicable Tariffs, etc.) Financing Norms, Debt policies, etc. Infrastructure of Financial Institutions, Commercial Banks, their approach to lending, etc. Economic environment State of the economy: ? Overall Growth (GDP, GNP, Rate of inflation; level of capital investments; FDI, State of financial markets (cost of capital); and Exchange rates)
? Per capita income / Increase in disposable income. ? Growth Rate of primary, secondary and tertiary sectors ? Position of international trade / Trade surplus / deficit ? Openness / linkage with international economy (WTO) Social environment and demography Trends in population growth. Shifts if any, in age of population (Retail boom). Sex ratio, family profiles and employment of women (Increase in per capita disposable incomes). Educational Development. Distribution of income, growth in per capita income. Extent of urbanization. Investment and consumption patterns / habits in the society at large. Technology trends Emerging new technologies in the industry sector/s in which one operates (e.g. Electronics, Telecom, Software, etc.). Access to new technologies, foreign or indigenous technical know – how (e.g. Aramid Fibers, cryogenic engines). Adaptability of new technologies by the industry and consumer reaction. Competition How many competitors do you have? How do they compare in size, market share and strategy? Are new competitors entering the market? Who are they? Where are they from? What is the market's growth potential? Market homogeneity and differentiation in products: ? What is the market segmentation of your customer base (e.g. purchasing habits and preferences)? ? Why do your customers buy from you and not from your competitors? ? Can you list your key competitors in each market that you compete in? ? Can you demonstrate how your company differentiates itself from your competitors? Are there any entry barriers? Are there any substitutes? How do they compare in terms of quality, price, appeal, functional performance and availability? E.g. High Fructose Syrup Marketing Policies and practices ? Pricing of products (Is your price competitive? How did you arrive at your price structure?) ? How do you get your products and services to your end users? (Packing, sales & distribution) ? How will your operations be better than those of your competitors? Supply / availability of key inputs Availability of key raw materials (or sub-assemblies / ancillary products) and
their costs. Availability of trained manpower and costs thereof Availability and cost of utilities like power and water Availability of Finance / Funds and interest or costs thereof Geography Climatic conditions at chosen location (e.g. Humidity & Textile industry) Nearness to sources of raw materials and other supplies (e.g. Alumina production or Aluminum Smelting ) Nearness to markets (e.g. Heavy Industries) Incentives available from Government
PORTER MODEL
Michael Porter felt that the profit potential of an industry depends on various factors such as: ? Threat of new entrants ? Rivalry among existing firms ? Pressure from substitute products ? Bargaining power of buyers ? Bargaining power of sellers Potential Entrants
Suppliers
Bargaining power of suppliers
Threat of new THE INDUSTRY entrants Rivalry among existing firms
Users / Buyers Bargaining power of users
Threat of substitute products Substitutes
Threat from new entrants Additional capacity and hence competition may imply reduction in prices and hence lower margins and lower profitability. Threat from new entrants would be low if there are entry barriers for new units such as: ? The new ventures have to invest substantial resources to enter a particular industry / sector (while old units have made comparatively lower investments for similar capacities) ? Existing units have economies of scale and have depreciated their plant and machinery ? Existing companies have well established sales and distribution networks and control them. At least some of them command brand image, customer loyalty and many of them have
considerable experience in the field. ? Government policy may not encourage or even prevent new entrants ? For existing customers, the cost of switching from one supplier of products to another may be very high (e.g. Machine Tools) Threat from substitute products Substitute products imply more competition!! Severity of the competition would depend on various factors such as: ? Price competitiveness of the substitute (High Fructose Syrup V/S Sugar). ? Quality aspects (Paper v/s plastic coated paper). ? Ease with which the users can switch over to substitute products and costs thereof. ? Existing profitability of the sector which is producing the substitute vis-à-vis the original product Bargaining Power of users / Buyers Buyers can decide the fate of the firm if it is in “Buyers’ Market”!! They can bargain for price cuts, quality improvement and thus encourage competition for their own benefit. They can cut the profit margins of the firm. Buyers can be really effective in bargaining hard if: ? Their purchases are much higher than what the firm can produce and supply (i.e. they have a choice of other / alternative suppliers) e.g. non-precision autocomponents ? It is relatively easy for them to switch over to other suppliers / substitutes and costs thereof are marginal. ? They themselves can produce the product (backward integration). Bargaining Power of Suppliers Suppliers too can bargain hard for better prices. They can also compromise on quality and cut down on services if they are in “Sellers’ Market”. They would yield considerable bargaining power particularly if: ? There are very few suppliers in the market and buyers are many. (e.g. cooking gas, alumina) ? No substitutes are available (alumina for Al smelters) ? The buyers cannot easily switchover to other suppliers and costs of such a switchover are prohibitive (Machine Tools). ? Suppliers themselves can get into the field with forward integration!!
Project analysis and appraisal
Financial Institutions Promoters Factors to be studied: Market Appraisal Technical Appraisal Location Analysis Financial Appraisal / Viability Other considerations including Social Cost Benefit Analysis
PART I : Market analysis
First Step in project analysis or appraisal. ? What is the potential size of the market? ? What share of the market can you capture? Market analysis would involve: ? Preliminary Analysis and Defining objectives Product characteristics / usage / applications (Who are the buyers?) Approximate Market size and characteristics (Existing Mfrs., Sales in the past, etc.). Market segments (diff. ratings & types) & geographic distribution Pricing, packaging, Quality aspects, Guarantee / Warrantee, distribution channels, etc. ? Collection of secondary data usually from desk research Basically refers to desk research. Available published information Internet is a powerful tool – websites of concerned associations, manufacturers, dealers, Government Agencies, Regulatory Authorities, etc. provide good amount of secondary data. ? Market survey / Field Survey Aims at collecting primary information It is usually a sample survey and not a census survey. In a sample survey only a part / representative sample is contacted and relevant data collected to extrapolate for drawing conclusions. Census survey is possible only if the entire population to be covered is small / manageable ? Characterization of the market A typical good MS report should cover the following information: Product description, specifications, applications / uses / usage pattern or norms Characteristics of the market: Demand: - Past and the present demand (production + imports – exports) - Breakdown of demand according to different user segments and geographies, nature of product (sub-classification e.g. steel or aluminum) - Price trends ( Five years’ data, FOB, CIF, Wholesale, Retail) - Selling and distribution methods adopted in the industry, - Advertising and promotional methods adopted in the industry - Consumer profiles: Industrial consumers / domestic consumers Demographic & sociological such as age, sex, income, profession, social background, etc. Geographic division Attitudinal such as preferences, habits, attitudes, etc. Supply: - Existing suppliers (Foreign or local) Present installed capacity Trend in Capacity utilization & production Expansion plans, if any Quality of products Major problems faced by them in the past, if any Threats from substitute products, if any.
- Likely new entrants in the field. Scope: Gap in the demand for and supply of chosen product or services, Likely share of the market that one can expect to achieve. Recommended marketing strategy. Government policy: Can change the total perspective / picture completely!! Controls on trade, taxes, duties, subsidies, etc.
? Forecasting Demand & Supply and assessing the gap I. Qualitative Methods: Delphi method : Opinions of managers in the field sought through a questionnaire and summary of consolidated findings prepared and sent to them again and again till reasonable agreement emerges. Jury of executive method: Opinions of a group of successful managers sought on likely sales in the future and these figures are then simply consolidated II. Time Series Projection Methods: Trend projection method: i. First a trend is determined by establishing a relationship between demand and supply based on past consumption statistics ii. Next, this equation / relationship is used to extrapolate the trend and estimate the demand for the future. Where, Y = Demand X = Time variable
Instead of linear relationship, you could also have: ? Exponential Relationship Y= a ebx ? Polynomial Relationship Y= a0 +a1X+a2X2+a3X3+----+anXn ? Cobb Douglas Relationship Y= aXb III. Other methods: ? End Use Method ? Consumption Level Method ? Leading Indicator Method ? Chain Ratio Method ? Econometric Method ? Preparing a complete market plan
PART II -TECHNICAL ANALYSIS
Comes under the domain of technical or engineering experts.
Basically involves technical appraisal of given project. BASIC PARAMETERS Plant capacity Plant capacity has to be decided only after careful consideration of following aspects: Economies of scale / Technology requirement (Aluminum smelter or cement plant) Input constraints Investment costs: C1= C2 (Q1/Q2)? Market Potential Resources at the disposal of the firm Government Policy Product Mix Is guided by market forces Should be aimed at maximizing the profits e.g. soap manufacturing. Production facilities should be planned to allow flexibility in product mix to adjust to changing market conditions. Appropriate trade off between additional investment and flexibility in product mix is necessary Manufacturing Process / Technology For many products, two or three alternative processes are available: DMT versus PTA route for the manufacture of polyester or PET is a well known controversy. Steel: Blast furnace, Electric Arc Furnace Route Dry process versus wet process for portland cement manufacturing. Solvent extraction plants could use batch process or continuous process, Refining could be mechanical refining or chemical refining. Bio-diesel could be produced from vegetable edible or non-edible oils Technical arrangements Appropriate arrangements for technical know how for the manufacturing process are prerequisites for a successful operation. Technical collaboration, if necessary, should consider: 1. Project and process designing, technical inputs, selection of equipment, installation, commissioning, maintenance contract, training of personnel, etc. 2. Period of collaboration, 3. Terms and conditions of collaboration viz. lumpsum payment, licensing fee and / or royalty, 4. Process and performance guarantees wrt capacity, process parameters, consumption of raw materials, utilities, etc. – penalty clauses 5. A clause for continuous updating of know-how, benefits of R & D work, 6. Use of brand names, export assistance or restrictions if any, 7. Participation in equity, 8. Assignment of responsibilities in case of change of ownership, 9. Termination of agreement and dispute mechanism, 10. Clauses applicable in case of force majeure Materials and inputs Advance and meticulous planning is required for procurement of right quality / specifications & quantities of: Raw materials (Agricultural, Marine, Mineral, Livestock, Forest Products, etc.) Utilities
Processed industrial materials, components, Auxiliary materials / consumables and factory supplies, etc. CAN FORWARD CONTRACTS BE ENTERED INTO? Location and site. Proximity to suppliers of raw materials and markets Proximity to ancillary units Availability of Infrastructure Labor situation Government policies and incentives Other factors SITE SELECTION IS ALSO IMPORTANT! EXAMPLE: GRANITE FACILITY
Environmental aspects These aspects are assuming more importance in the field of project management with increased awareness of our responsibilities for a pollution free environment. Pollution could be: Noise, solid or gaseous emissions into the air, Liquid discharge, heat and vibrations, etc. Identify the sources of pollution, assess the quantum of pollution and plan the mitigation measures well in advance. It is a good idea to conduct “Environmental Impact Assessment (EIA)” study if the project is likely to result into any environmental damage and take effective steps to mitigate it. Ensuring environmental clearances by meeting all statutory requirements is a step in the right direction. Leather, paper, textiles, cement, steel, coal based thermal power stations, granite processing facilities and chemical industries must plan for environmental measures well in advance.
Civil works and structures Site preparation and development (grading & leveling, roads, fencing / boundary walls, connections for utilities, pipelines, cabling, drainage, etc. within battery limits.) Buildings and Structures (Administrative, Factory & Auxiliary buildings like storage, warehouses, Residential, Canteen, Medical, Prayer rooms, etc.) Work outside the battery limits of the plant: supply and distribution of utilities, effluent disposal, transportation arrangements, etc.
Machinery and Equipment Choice depends on the technology used and the designed capacity of the plant. Capacities of different sections should match (Detailed calculations are required to decide on configurations of machinery / process equipment, estimate of likely levels of production, type of machine operations, production hours required for each operation and hence machine, number of machines required and provision for emergencies, etc.). Equipment could be of different types: Process, mechanical, electrical, instrumentation & process control equipment, internal transportation (cranes, lift trucks, etc.) List of maintenance equipment, quality control laboratory, spare parts and tools required. Constraints on selection of plant and machinery (availability of power, large size equipment and hence difficulty in transportation, shortage of skilled labor, etc.) Coordination for procurement of plant and machinery: Different items from different
suppliers, Turn-key project v/s in-house responsibility of packaged contracts, Factors to be considered while making a choice of supplier/s (reputation, quality, delivery schedules, terms of payment, Performance Guarantees (mechanical, input and output), and rewards or penalties related to period of completion. Plant layout & project charts Functional Layout Plant Layout (smooth flow of raw materials, proper utilization of space, provision for expansion, safety of personnel, minimizing movements and hence production costs) Flow process chart and Material Flow Diagram (ideally, balance of material at every stage should also be mentioned). Production Line Diagram Utility Line Diagrams and Consumption Layout, Transport Layout Communication Layout Organization Chart
Project implementation schedule For smaller projects, a simple bar chart showing different activities and timing is adequate. Work Schedule: Detailed work plan of at least initial activities is however desirable. For complex projects, it is necessary to prepare PERT / CPM charts. Financial Institutions now a days insist on network techniques to know the schedule of implementation. The topic is separately dealt with in great details.
Considering alternatives. Nature of project: make or buy decisions Production process (solvent extraction) Product quality (footwear, textiles) Scale of operation and phasing of operations (Aluminum smelter) Location (Single plant or multiple locations)
ESTIMATING PROJECT COSTS
Tools & techniques for cost estimation 1. ANALOGOUS ESTIMATING: Also known as top-down estimating. • • • • Uses actual cost of previous, similar project as a basis for estimating total cost of current project. Used in early phases when detail information on project is not available. Generally, a quick & less accurate technique, but also less costly It is most reliable when a. Previous project is similar in fact & b. Individuals / group preparing budgets have the needed expertise
2. PARAMETRIC MODELING:
• Uses project characteristics (Parameters) in a mathematical model to predict project
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costs. Cost and reliability of the model highly depends upon a. Accuracy of historical information used to develop the model b. Easy quantifiability of parameters used c. Scalability of the model for large and small projects
3. BOTTOM-UP ESTIMATING:
Uses estimates of costs for individual work items to be summarized or rolled-up to get total project estimate. • Cost and accuracy depends on a. Size of individual work item: smaller work items increase both the cost and accuracy. b. Project management team has to weigh additional accuracy against additional cost 4. COMPUTERISED ESTIMATION TOOLS: • • Computerised tools such as Project Management software and spreadsheets are widely used to assist cost estimation Such products simplify the use of tools mentioned earlier and thereby facilitate rapid consideration of many costing alternatives.
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ELEMENTS OF PROJECT COST Land & site development Cost of acquisition of land (basic cost, cost of conveyance, stamp duty, etc.) (Extra land acquired but not meant for the project is not considered) Premium paid on leasehold land & conveyance charges paid. (Lease Rent?) Cost of site development: Leveling, Approach roads, Internal Roads, Fencing, Gates, etc. Cost of tube wells. Buildings & civil works Factory building Administrative building Auxiliary buildings housing utilities’ equipment, warehousing / storage house, etc. Non-factory buildings: Residential buildings / staff quarters, canteen, guest house, watch & ward, time office, compound wall / fencing, etc. Places of prayer, Silos, tanks, garages, etc. Drainage, sewerage system, etc. Any other civil work including special foundations, podiums, etc. Architect’s fees Plant and machinery Cost of indigenous machinery (FOR value + sales tax, Octroi, other taxes and transportation cost to the site) Cost of imported machinery (FOB value, shipping charges, local transportation costs, cost of insurance, clearing, loading & unloading and import duty) Cost of stores & spares Foundation and installation charges For financial appraisal, FIs normally insist on three latest quotes and allow for a provision for inflation, foreign currency rate fluctuation, etc. if not separately provided in provision for
contingencies Technical know-how & engg. Fees, expenses on foreign technicians & training of project personnel abroad Fees of consultants, collaborators, etc. for: ? Assistance on technical matters e.g. Project Report, selection of process / technology, plant and machinery, detailed project engineering, supervision during installation and commissioning, etc. ? Expenses on foreign technicians and on training of Indian technicians abroad (all expenses). ? Recurring payment of royalty does not form a part of the project cost; it is treated as operating expense. Miscellaneous fixed assets Assets, which are not a direct part of the manufacturing process. - Furniture and fixtures, - Office equipment and machines, - Vehicles, - D.G. sets, Transformers, Switchgear, boilers, piping systems, workshop and quality control / laboratory equipment, - Investment in effluent treatment plants, - Lump sum payments for trade marks, licenses, copyrights, deposits paid to Electricity Boards, etc. Preliminary expenses Expenses incurred on identification of the project, market survey, Techno-Economic Feasibility Report, drafting of Memorandum and Articles of Association for the company, Incorporating and registering of the company, Legal charges, etc.. Expenses incurred on capital issues by the company such as underwriting commission, brokerage, fees to registrars of issue, managers to the issue, printing, publishing prospectus, advertising, listing fees, stamp duty, etc. Pre-operative expenses Expenses incurred on the following till the start of the commercial production: ? Interest on borrowed funds during the implementation period, commitment charges, etc. ? Establishment expenses e.g. rent paid, traveling expenses, insurance charges, mortgage expenses, etc. ? Trial production or start up expenses. ? Miscellaneous expenses Pre-operative expenses can be apportioned to fixed assets on some acceptable basis. The firm may also treat them as deferred revenue expenditure and write them off over a period of time. Provision for contingencies This is a provision for unforeseen expenses: ? Inflation, ? Exchange Rate risks, ? Delay in execution and hence escalation of costs ? Any other miscellaneous costs / liabilities that may arise. Normal provision is 5% of firm costs and 10% for non-firm costs, though this may vary depending on the size and nature of the project.
Margin money for working capital Banks normally provide finance / credit facilities for meeting requirements of working capital. A part of this is to be brought in by the promoters basically from long term sources of finance. This is a critical element of project cost particularly if there are over-runs in the cost. FIs normally block an amount equivalent of the margin money from the term loans till the project is complete. Initial cash losses, if applicable Most of the promoters do not show these as a part of the project cost. Prudence however calls for making such a provision if there are any initial losses since they could affect the liquidity position of the company.
PROJECT FINANCING Project financing is a special case of financing in which lenders have to rely on repayment from the net cash flow generated by the project. Project finance is usually provided against assets of and the rights in a particular project rather than against the borrower’s balance sheet, though Net worth of the promoters is also important. Financers are therefore concerned with the analysis of the risks associated with the project before they accept the investment opportunity which it represents. The cost and terms of financing therefore reflect the financier’s view about the risks involved in implementing the project. Need for project financing For companies in general, to enhance their investment limits. To spread the risk among several parties to lessen adverse financial impact if any, and to increase their capacity to undertake more projects. For multinational corporations to protect their corporate balance sheets from the impact of large projects For governments to share the costs and risks of exploiting natural resources For governments to increase foreign capital investment in the country at no cost to the country. Financing strategy The project will fail, no matter what is its technical merit, unless enough finance is made available to complete it. The design, implementation and management of project financing demands the same level of commitment from the promoters as the rest of the project management activities. Financial planning should begin at the same time, or in some cases even earlier than the technical project planning. While financing package is likely to reflect the complexity of the project, finance has some inherent characteristics, which themselves add to the complexity of undertaking. SOURCES OF FINANCE Identifying sources of finance Identifying suitable sources of finance is the first step in planning finance for a project. Finance for projects falls into two major categories viz.
DEBT AND EQUITY Debt: Borrower has the obligation to repay. Debt also usually carries obligation to pay interest and to adhere to a prearranged repayment schedule. The lender has priority claim if borrower goes into liquidation The main sources of debt finance are: Commercial banks Multilateral lending institutions Suppliers of equipment & services for the project Suppliers of raw materials to the project Buyers of output from the project
Equity: Funds subscribed by the shareholders from their own resources. Equity has no maturity date. No obligation to pay dividend or no need of repayment. If cash surplus is not sufficient, dividends can be skipped!! Higher the equity, greater is the leverage to raise debts. Investors tend to loose their money if the project fails to perform. Equity shareholders have the last claim if the project goes into liquidation. Sale of equity shares can dilute the control of the owners. Cost of equity is usually high. Dividends are paid from PAT while interest payments are tax deductible expenses. Cost of raising equity is very high The main sources of equity finance are: Internal: Corporate cash flow generated by existing business operations Public: Corporate or individual investors, or funds raised through stock markets Joint venture partners Government subscriptions & aids Multilateral investment institutions *Venture capitalists EQUITY V/S DEBT
LEASING V/S HIRE PURCHASE
1) Share Capital (Equity & Preference)- (dividend, claim, control, tax) 2) Term Loans (Secured Borrowings) – major source of finance ? Rupee or Foreign Currency Term Loan Financial Institutions are the primary sources for term loans. Term Loans are normally payable in less than ten years. Usually there is a moratorium of two years and repayment is made in five to seven years. Repayment of principal is in terms of equated semi-annual or quarterly installments. Term loans are used to finance purchase of fixed assets and margin money only. 3) Incentives (Capital subsidy or seed capital, tax deferment or exemption) 4) Debenture Capital (Debt instruments: convertible or non-convertible, more flexible than term loans) 5) Deferred Credit (usually offered by suppliers of plant and machinery – interest and phased payment conditions vary – bank guarantees are required) 6) Other sources (unsecured loans by promoters, lease or hire-purchase programs, Public deposits, etc.) 7) Raising capital in international markets: Eurocurrency Loan: External Commercial Borrowings, raising capital in a global market: 1. 2. 3. 4. 5. These are syndicated loans. Syndication fee payable to lead bank. Rate of interest is a floating rate usually linked to LIBOR or SIBOR Tenor of up to 10 years is possible Multi currency option is possible Repayable in installments.
Global Depository Receipts: Indirect equity investment - Shares issued by a firm are held by a Depository (International Bank like Bank of New York), which receives dividends, reports, etc. and issues claims. Each receipt is a claim on specific number of shares. 1. GDRs are denominated in a convertible currency 2. GDRs may be listed on major stock exchanges 3. Issuer firm pays dividends in home currency. 4. Issuer firm can thus avoid listing procedures, disclosures, etc. 5. 8) Uunconventional sources of project financing: Leasing & Hire Purchase: Use of project assets through off-balance sheet financing. Forfaiting: Sale of financial instruments due to mature in future. Counter-Trade: Seller accepts goods or services in lieu of cash payments. Switch Trading: Making use, via a third party, of un-cleared credit surpluses arising from bilateral trade agreements. Offset: Exporter of technically advanced project incorporates an agreed value of materials, equipment & services supplied by the buyer. Factoring: SBI and Canara Bank are factors. Factor selects accounts of clients and establishes along with the client the credit limits. The factor takes the responsibility of collecting the debt accounts. The factor can advance money to the client against not
yet collected or not yet due loans. Factoring can be on recourse basis (risk of credit is born by the client) or non-recourse basis. Franchise Financing: Engineering, Procurement & Construction (EPC) contractors become equity holding joint venture partners for the project they design & build. Debt/Equity Swapping: Multinational technology owner buys host country debt at a discount. The debt is redeemed in local currency at favorable rate of exchange for setting up a local company. The local company uses transferred technology to earn foreign exchange, replace imports & generate local employment. Build – Own - Operate – Transfer (BOOT): Government grants concession to a project company (SPV) to build a facility and operate it on commercial basis. Facility is transferred to the government at the end of the concession. This type of finance arrangement is usually used for infrastructure projects.
FINANCIAL APPRAISAL BY FINANCIAL INSTITUTIONS:
Justification of estimate of cost of capital Justification for estimate of working capital Adequacy of Rate of Return: ? IRR: should be 3 to 5 % more than WACC and not less than 15% ? DSCR: 1.5 to 2.0 or more ? ROI: should be ideally 15% or more Justification of Debt:Equity Ratio ? Should be 1.5:1 ? Debt should be adequately covered by investment in immovable fixed assets ? Stock Exchange regulations are to be met in case of listing. ? Promoters should contribute a certain minimum percentage of the project cost ? Means and capacity of the promoters to contribute to a reasonable share of the project cost
Project manager His responsibility is to plan, organize, direct and integrate work efforts of all participants to achieve the set project goals (costs, time schedules and scope goals). One person in the organization who is accountable for the project and is totally dedicated to achieving its goals. Leadership qualities are essential. Duties of project manager :As a resource manager: manage and direct project resources to achieve the project objectives. (men, money, material, machines, etc.) As a planning & control manager: develop the project plan and ensure that the work is completed on time, within budget and with acceptable quality. As a co-ordinator: interface with higher management regarding project review, approvals and addressing project issues. These must also relate successfully to line managers and staff. Directing Motivating Planning Supervising : : : project resources project team anticipate and plan : the project work
Administering Doing Training Counseling Delegating Resolving conflict Project team
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: administrative tasks : doing some tasks directly project team : technical, business, project & personal issues delegate & supervise over resources and schedules
Project work is team work. Project work is accomplished by a group of people from different functional areas and organizations. Size and composition of the team will vary depending on the project requirements. The team may be disbanded after the project work is completed. Project management v/s general management
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