Professional Documents
Culture Documents
01/01/2010 3
5 Selection of location and site of the project, 184 –
Factors affecting location 219
01/01/2010 5
Reference Books
1. SC : Project Management – By S.Chaudhury;
2. PG : Text Book of Project Management –
By P.Gopalakrishnan and V E Ramamoorthy;
3. PC: Project Management – By Prasanna
Chandra (SeventhEdition, 2009/Sixth Edition);
(Tata McGraw –Hill Publishing Co. Ltd)
• 4. PM: Project Appraisal – By P K Mattoo;
• 5. VD : Project Management – By Vasant Desai
(3rd revised Edition, 2008)- (Himalaya Publishing
House);
01/01/2010 6
Reference Books…
01/01/2010 7
Useful Websites
• http://www.dipp.nic.in (Dept. Of Industrial Policy and
Promotion, Govt. of India);
• http://www.india.gov.in (Government of India);
• http://www.rbi.org.in (Reserve Bank of India;
• www.ifciltd.com (Industrial Finance Corporation of India
Ltd.);
• http://www.weforum.org (World Economic Forum,
Geneva, Switzerland
• (www.icicibank.com (ICICI Bank Ltd.);
• www.idbi.com (IDBI Bank Ltd.);
• www.utimf.com (UTI Mutual Funds);
• www.utiventures.com (UTI Ventures Ltd.);
01/01/2010 8
Useful Websites....
01/01/2010 9
Useful Websites....
• www.nabard.org (National Agricultural Bank for Rural
Development-NABARD);
• http://www.worldbank.org/ (World Bank):
• http://www.microsoft.com/project/en/us/product-
information.aspx (Microsoft Office Project Professional –
Project Soft ware)
---------------------------------------------------------------------------
Total Marks: 100 (Internal Assessment: 40 marks +
Final Written Examination : 60 marks)
(Internal Assessment : Attendance : 10 marks +
Presentations - Assignments of Teaching of
topics to the class : 15 marks + Class Test : 15
marks. )
01/01/2010 10
1. Introduction: Project and
Project Management
• ―Project Management is the business process of
creating a unique product, service or result. A
project is a finite endeavour having specific
start and completion dates undertaken to
create a quantifiable deliverable. Projects
undergo progressive elaboration by developing
in steps and predictable increments that are tied
to benchmarks, milestones and completion
dates.‖
• A Project is a specific activity on which money is
spent in the expectation of returns. There is
therefore a specific starting point, a specific end
point and it is intended to achieve a specific
objective.
01/01/2010 11
1.Introduction: Project and
Project Management
• Project is an organised programme of activity
carried out to reach a defined goal, often of a
non-recurring nature with a specified terminal
point.
• It is a package of time-bound, scheduled and
assembled activities dedicated to the attainment
of a specific objective of successful completion
of a work on time and within the allotted
budget.
• Project is a one-shot, time-tested, goal-
directed major undertaking requiring the
commitment of varied skills and resources.
01/01/2010 12
1.Introduction: Project and
Project Management
• Project is the whole complex of activities
involved in using resources to gain benefits.
• Project is a system involving coordination of a
number of interrelated activities to achieve a
specific objective.
• Project Management Institute (PMI) : ―A Project
is a temporary endeavour undertaken to create
a unique product or service.‖ ―Project
Management is the application of knowledge ,
skills, tools and techniques to project activities in
order to meet or exceed stakeholder needs and
expectations.‖
01/01/2010 13
1.Introduction: Project and
Project Management
01/01/2010 16
1.Introduction: Project and
Project Management
• Project Management (PM) is quite unique. It
calls for sharper tools of planning and control
and improved ways of coping with human
problems caused in a project setting.
• PM is complex. It involves issues like forms of
project organisation, project planning,
project control and human aspects of PM.
• PM is always customer specific, the
requirements and constraints within which a
project must be executed are stipulated by the
customer.
01/01/2010 17
1.Introduction: Project and
Project Management
• PM is always interdependent and inter-related.
The management should be quick and flexible in
dealing with ever-changing dynamic situations
which pervade very many aspects of the society.
• In sum, PM is a teamwork. It will organise
around a process that is essentially customer-
oriented. It will always strive to bring maximum
benefit to the society with minimum cost within
the shortest stipulated time frame.
01/01/2010 18
1.Introduction: Project and
Project Management
• Generally, Organisational structures and
processes are custom made to produce a
specific product or service. Sometimes,
organisations have to take up new tasks that
they are not equipped to handle.
• These tasks are new to the organisation as
they are not performed earlier or they may
not be repeated in the future.
• To perform such unique tasks, organisations
adopt the project approach. The project
approach is adopted when the existing
systems in the parent organisation are not
equipped to handle the new task.
01/01/2010 19
1.Introduction: Project and
Project Management
• Some of the characteristics of the tasks that
qualify to be projects are:
Unique activities;
Attainment of a specific goal;
Sequence of activities;
Specified time;
Interrelated activities.
01/01/2010 20
Project Management
- Knowledge Areas:
• Scope Management
• Time Management
• Cost Management
• Quality Management
• Human Resources Management (Organizational
Planning; Staff Acquisition; Team Development )
01/01/2010 21
Knowledge Areas….
• Communications Management
(Communications Planning; Information
Distribution; Performance Reporting;
Administrative Closure )
• Risk Management (Risk Identification;
Risk Quantification; Risk Response
Development; Risk Response Control)
01/01/2010 22
Knowledge Areas….
01/01/2010 23
Leadership Skills:
• Vision and Strategy
• Establishing Direction
• Aligning People
• Communicating
• Negotiating
• Motivating and Inspiring
• Influencing Organizations
• Overcoming Barriers to Change
01/01/2010 24
General Management Skills:
• Planning
• Finance and Accounting
• Personnel Administration
• Technology
• Organizational Development
• Delegation
• Team Building
• Conflict Management
• Solving Problems
01/01/2010 25
Communications Skills:
• Writing
• Listening
• Speaking
• Presenting
• Media Relations
• Meeting Management
01/01/2010 26
Project Management
01/01/2010 27
1.Introduction: Scope and coverage
• „Scope‟ of a project:
• A project management term for the combined
objectives and requirements necessary to
complete a project.
• Properly defining the scope of a project allows a
manager to estimate costs and the time required
to finish the project.
• Scope can involve a variety of things, depending
on the type of project. For example, if the project
was to design an airplane, the scope could
include the functional requirements of the plane,
such as how many passengers it can carry or
how fast it should be able to travel.
01/01/2010 28
1.Introduction: Scope and coverage
• It is the responsibility of the project manager to
ensure that the scope's deadlines are met,
allowing for smooth completion of the project.
• This may be sidetracked by scope creep, which
occurs when the project gains additional
features or requirements without extending the
deadline.
1.Introduction: Scope and coverage
• The Scope of a project can be divided into two
parts: „Product Scope‟ and „Project Scope‟.
• The Product Scope details all the functions and
features that are to be included in a product or
service of a product whereas the Project Scope
details the work to be done to deliver a required
product with specific features.
• The tools and techniques for managing product
scope vary with the nature of the project.
Scope Management:
• Initiation
• Scope Planning
• Scope Definition
• Scope Verification
• Scope Change Control
01/01/2010 31
Scope Management:
• Project Planning : Components:
What ? : Work Breakdown Structure;
How? : Plans and Specifications;
Who? : Organisation Breakdown Structure;
How Much?: Cost Breakdown Structure (Via
Estimates);
When? : Schedule.
1.Introduction: Scope and coverage
• In PM, the scope of a project is the sum total of
all of its products and their requirements or
features. Sometimes the term scope is used to
mean the totality of work needed to complete a
project.
• Scope is a brief and accurate description of the
end-products or deliverables to be expected
from the project that meet the requirements.
• Scope describes all the activities that are to be
performed, resources that will be consumed and
the end-products from the successful completion
of the project, including quality standards.
01/01/2010 33
1.Introduction: Scope Statement
01/01/2010 34
1.Introduction: Scope Statement
01/01/2010 35
1.Introduction: Scope Statement
• The scope statement details the project
deliverables and describes the major
objectives. The objectives should include
measurable success criteria for the project.
• ‗Deliverables‘ is a Project Management term for
the quantifiable goods or services that will be
provided upon the completion of a project.
• Deliverables can be tangible or intangible parts
of the development process, and are often
specified functions or characteristics of the
project.
01/01/2010 36
1.Introduction: Scope Statement
01/01/2010 38
1.Introduction: Scope Statement-
Product Breakdown Structure (PBS)
The project requirements
The project deliverables
The project non-goals (what is out of scope)
Milestones
Cost estimates
• In PM, a product breakdown structure (PBS) is
an exhaustive, hierarchical tree structure of
components that make up an item, arranged in
whole-part relationship.
• A PBS can help clarify what is to be delivered by
the project and can help build a Work
Breakdown Structure (WBS).
01/01/2010 39
1.Introduction: Scope Statement-PBS
• The PRINCE2 project management method
mandates the use of product based planning,
part of which is developing a product breakdown
structure.
• PRojects IN Controlled Environments (PRINCE)
is a project management method. It covers the
management, control and organisation of a
project. "PRINCE2" refers to the second major
version of this method and is a registered
trademark of the Office of Government
Commerce (OGC), an independent office of HM
Treasury of the United Kingdom.
01/01/2010 40
PRINCE2
• PRINCE2 is a structured approach to project
management.
• It provides a method for managing projects within a
clearly defined framework.
• PRINCE2 describes procedures to coordinate
people and activities in a project, how to design and
supervise the project, and what to do if the project
has to be adjusted if it doesn‘t develop as planned.
• In the method each process is specified with its key
inputs and outputs and with specific goals and
activities to be carried out, which gives an automatic
control of any deviations from the plan.
Figure of a PRINCE2 process model
01/01/2010 42
1.Introduction: Scope Statement-PBS
01/01/2010 43
1.Introduction: Scope Statement-
Work Breakdown Structure (WBS)
Mouse : --Body, --Marble, --Cable…..
Keyboard
• A WBS in project management and systems
engineering, is a tool that defines a project and
groups the project‘s discrete work elements in a
way that helps organize and define the total
work scope of the project.
01/01/2010 44
1.Introduction: Scope Statement-WBS
01/01/2010 46
1.Introduction: Scope Statement-WBS
01/01/2010 47
1.Introduction: Scope Statement-WBS
01/01/2010 48
1.Introduction: Scope Statement-WBS
01/01/2010 49
1.Introduction: Scope Statement-WBS
01/01/2010 51
1.Introduction: Scope Statement-WBS
01/01/2010 53
1.Introduction: Scope Management Plan
01/01/2010 56
1.Introduction: Project phases
01/01/2010 58
1.Introduction: Project phases
01/01/2010 59
1.Introduction: Project phases
…..Detailed engineering and statutory
documentation preparation for required
approvals from various bodies, safety and
security Procurement, transportation and
insurance etc. erection and pre-
commissioning activities Commissioning
Performance trials and commercial
production.
• The Post-project activities may be similarly
broken down into the following activities:
• Stabilising the process parameters and
instrument settings…..
01/01/2010 60
1.Introduction: Project phases
….Preparation of ‗as–built‘ drawings,
incorporating all the changes/ modifications
made during execution, commissioning and
stabilising operations including field changes,
and all the operating disciplines Training of
operation, maintenance and safety staff
Compilation of all operating and maintenance
manuals, catalogues, drawings and technical
details, in an easily retrievable manner including
guarantees for equipments Awareness
programmes for quality and safety Monitoring
balance erection work such as roads, drains,
plastering, paintings etc.,….
01/01/2010 61
1.Introduction: Project phases
01/01/2010 62
2. Organising Project Dept.
01/01/2010 64
2. Organising Project Dept.
• A project manager‘s choice of organisational
structure depends on the nature of the project and
the degree of control required for its
implementation.
• Some of the organisational structures that a
project manager can consider are:
Traditional Organisational Structure Pure
PRODUCT Organisational Structure Pure
PROJECT Organisational Structure Matrix
Organisational Structure.
01/01/2010 65
2. Organising Project Dept.
• The Traditional Organisational Structure is
developed around the functional aspects of the
organisation such as engineering, manufacturing,
marketing, human resource and information
systems.
• While Projects in individual functional
departments do not face any problems, when
different departments have to be coordinated,
the project manager may have to assign, control
and monitor the work through the functional
manager, because of his lack of authority in the
functional department.
01/01/2010 66
2. Organising Project Dept.
• Some of the advantages and disadvantages of
the Traditional structure are as follows
Advantages Disadvantages
Easy No single person is responsible
control, for the total project – lack of
budgeting authority and hence reduced
procedures motivation and innovation
01/01/2010 67
Sharing of Project-oriented emphasis is absent
knowledge and and hence lacks customer focus and
responsibilityslow in responding to customers‘
and grouping needs, ideas are function oriented and
of specialistsnot project-oriented—difficulty in
achieving tasks
Flexibility in Complex coordinating system—
use of broad consumes more time in approving the
manpower decisions
Continuity in Possibility of partiality in decision
functional making
disciplines
01/01/2010 68
2. Organising Project Dept.
01/01/2010 73
2. Organising Project Dept.
• Pure Project Organisational Structure:
Organisations working on large and long-term
projects usually adopt pure project organisational
structure.
• This type of organisation structure contains
functional departments within the individual
projects.
• All the team members contribute on full time
basis.
• This is a vertical organisational structure which
avoids conflicts and problems faced by the
traditional and product organisational structures.
01/01/2010 74
Advantages Disadvantages
The Project Manager has complete Inefficiency in resource
authority over the project utilisation
01/01/2010 76
2. Organising Project Dept.
01/01/2010 77
2. Organising Project Dept.
• …….The Project Manager is responsible for the
technical excellence of the functional
departments in managing the departments.
• This structure functions in a collaborative
manner – i.e. it shares the information and
personnel while executing the project.
• The primary objective of the Matrix
organisational structure is to derive synergy
through shared responsibility between the
project and functional management.
• The strength of the structure depends on the
level of control that the Project Manager is able
to exercise over the functional resources.
01/01/2010 78
2. Organising Project Dept.
• Advantages of the Matrix organisational
structure:
Enables the Project Manager to exercise control
over all the resources
Every project has its own independent set of
policies and procedures
Authorises the Project Manager to commit the
company resources ensuring that scheduling
does not clash with other projects
Facilitates quick response to conflicts, changes
and other project needs
01/01/2010 79
2. Organising Project Dept.
Derives support of the functional department to
the project
Enables proper HR Development by enhancing
the career prospects of team members
Facilitates cost minimisation by sharing key
personnel
Facilitates spending more time to solve complex
problems
Develops a strong technical base
Eases solving of the problems that require top
management involvement
01/01/2010 80
2. Organising Project Dept.
Minimises conflicts
Ensures optimum balance among time cost and
performance
Enables authority and responsibility sharing
• There are some pre-conditions to be fulfilled for
a Matrix Organisation Structure to be
established. They are: It should be ensured
that :
All the team members commit to spend full time
on the project
Conflicts are resolved quickly…….
01/01/2010 81
2. Organising Project Dept.
The resources are negotiated with function and
project oriented managers
The functional departments function as
individual entities
• It is observed that the following are the situations
which favour the implementation of the Matrix
structure:
The primary output of an organisation is a
complex product
The organisation serves multiple customers in
different geographical locations
01/01/2010 82
2. Organising Project Dept.
A project with complex design that requires
innovation is to be finished on time
Large amounts of data are required to be
processed
Designing, developing and testing a product
requires sophisticated skills
Resources have to be shared among different
projects
The market conditions demand rapid changes in
the product
01/01/2010 83
A diagrammatic representation of a Matrix Organisational Structure:
General
Manager
PM 1
PM 2
PM 3
01/01/2010 84
2. Organising Project Dept.
• There are three types of Matrix organisations
– Weak, Balanced and Strong.
• Refer to Book by Gray and Larson and
Explain these three forms.
2. Organising Project Dept.
• Selecting an organisational structure: PM has
become a specialised field due to the need for
implementing complex and large projects within
the defined constraints of time, cost,
performance and profit.
• The traditional organisational structure have
proved to be ineffective to deal with the
complexities of Project Management.
• Therefore it is necessary for organisations to
identify the most appropriate organisational
structure for the successful execution of a
project.
01/01/2010 86
2. Organising Project Dept.
01/01/2010 87
2. Organising Project Dept.
• According to Hobbs and Menard, the following seven
factors influence the choice of PM structure:
1. Size of Project;
2. Strategic importance;
3. Novelty and need for innovation;
4. Need for integration (number of departments involved;
5. Environmental complexity;
6. Budget and time constraints and
7. Stability of resource requirements.
2. Organising Project Dept.
01/01/2010 89
Project Management Organisational Structure
Advantages Disadvantages
Effective project control Lack of consistency in
applying company policies
Improved relationship Under utilisation of personnel
with customers
Ability to develop Low profit margins
products faster
Minimum programme Increases complexity of
cost internal operations
Improved quality and High transfer rate of
reliability personnel among projects
Enhanced
01/01/2010 profit margins Duplication of functional skills
90
Advantages….. Disadvantages..
.
Effective and efficient control on
the security of the programme
01/01/2010 91
2. Organising Project Dept.
• It should be borne in mind that the change over
to the Project Management structure is a huge
forward leap and going back to the traditional
structure is not possible.
• The Project Management structure brings in an
upgradation of jobs and job profiles.
• After selecting the appropriate structure, it is
necessary to select the personnel required to
work on the project.
• The ‗Right People for the Right Jobs‘ have to be
identified and engaged for the success of the
project.
01/01/2010 92
2. Role of Consultants
• Role of Consultants in Project Management:
As the economic growth is more than the
development of Infrastructure in India in
particular and Asia in general, the development
of Infrastructure has gained topmost priority.
Whether it be telecommunications, power,
highways/roads, airports, seaports, water
supply or sewerage disposal, all are lagging far
behind the ideal levels of development as
envisaged under the ‗CMP‘ (Common Minimum
Programme).
01/01/2010 93
2. Role of Consultants
The Government in the 11th Five Year (2007-
2012) has increased the outlay in Infrastructure
significantly to Rs.17,58,000 Crores (US$ 439.5
Billion) from the 10th Plan figures Rs.8,15,000
Crores (US$ 203 Billion) at 2006-07 Prices.
The major thrust areas for these investments will
be in Power, Roads and Railways which account
for 2/3rd of the plan outlay in Infrastructure.
01/01/2010 94
2. Role of Consultants
India‘s Infrastructure investment requirements
until 2010-2011, which includes investments in
the transport, telecommunications, energy, and
urban sectors, is estimated to be about $425
billion. Of this total, there is a $123 billion
anticipated financing gap which is being sought
from the Private Sector. (Study by the
International Project Finance Association-IPFA)
01/01/2010 95
2. Role of Consultants
To achieve and sustain the required level of
growth, India needs to finance the infrastructure
sector in trillions of rupees.
In this context, some Consultants specialise in
managing these project operations.
Consultation has become a good business these
days and all they require to run business is to
acquire experienced employees from different
fields.
Project Management consulting is one of the
growing consultation businesses since, before
starting any projects, more and more companies
seek the services of consultancy firms for their
project needs, to eliminate risk.
01/01/2010 96
2. Role of Consultants
01/01/2010 97
2. Role of Consultants
• ―It is common today, for a key team member to
be appointed as manager for a business critical
project.
• This individual normally has excellent ―technical‖
knowledge of the project.
• The million $ question is, do they have the
systems, competence and available time, to
project manage professionally?
• The statistics suggest probably not.
• Most project management surveys in the last
decade indicate that many projects fail to
successfully meet their objectives...........
01/01/2010 98
2. Role of Consultants
• ………… – just think of the disappointed
customers, advantaged competitors, and lost
profits that result.
• Those companies who have recognised the
potential for savings have employed dedicated
Project Managers, either interim or on the
payroll, with mixed success.
• Recruitment is the first challenge – what do you
look for? Many business leaders have heard of
qualifications such as APM, PRINCE, PMI, and
the like, but are not sure what they mean.
01/01/2010 99
2. Role of Consultants
• Nor do they understand the relevance and
appropriateness for their business.
• Integration into the business is the next problem:
– are there suitable project management
processes and tools/templates in existence in
the business to be used?
-- or are the Project Managers (PM) left to their
own devices?
• The final big challenge is performance.
• Are the PMs delivering as well as they could and
should?
01/01/2010 100
2. Role of Consultants
• There is a clear need for a framework of
measurement and improvement. This need is
often overlooked.‖
• This is where the professional Project
Management Consultant comes in to perform
and deliver the targeted results.
01/01/2010 101
2. Role of Consultants
01/01/2010 102
2. Role of Consultants
01/01/2010 103
2. Role of Consultants
01/01/2010 104
2. Role of Consultants
01/01/2010 105
2. Role of Consultants
01/01/2010 110
3.Project Identification : Selection of
product
Four activities of the Strategic Management
Process:
Review and define the organisational Mission;
Set long-range goals and objectives;
Analyse and formulate strategies to reach
objectives and
Implement strategies through projects.
Mission statements may change….Then the
whole strategy has to also change accordingly.
3.Project Identification : Selection of
product
• Characteristics of the objectives ―SMART‖:
Be Specific in targeting an objective;
Establish a Measurable indicators(s) of
progress;
Make the objective Assignable to one person
for completion; (or Achievable)
State what can Realistically be done with the
available resources and
State when the objectives can be achieved, that
is (Time) duration.
3.Project Identification : Selection of
product
• Effective Project Portfolio Management System:
Avoids THE IMPLEMENTATION GAPS;
Avoids ORGANISATION POLITICS and
Manages RSOURCE CONFLICTS AND
MULTITASKING.
3.Project Identification : Selection of
product
• Classification of the Projects:
Compliance (and must do) (Regulatory or
Emergency);
Operational (Improving efficiency of the existing
systems) and
Strategic.
3.Project Identification : Selection of
product
• Selection of Projects - Criteria:
Financial and
Non financial: To capture larger market
share; to make it difficult for competitors to
enter the market; to develop complementary
products to develop core technology for use in
next generation products; to reduce
dependency on unreliable suppliers; to
prevent government intervention and regulation.
3.Project Identification : Selection of
product
Selection of Product:
The search for promising project ideas is the first
step towards establishing a successful venture.
Theoretically, a number of projects are available
for any entrepreneur.
The key to success lies in getting into the right
business at the right time.
The identification and implementation of good
ideas contributes significantly to the success of
a project.
3.Project Identification : Selection of
product
The generation of ideas and opportunities
requires imagination, creativity, sensitivity to the
dynamic external environment and a realistic
assessment of the firm‘s capabilities.
The Project Manager‘s innovative efforts have to
take into account the ever changing customer-
needs and preferences, new technologies, the
speed at which the products and their
technologies become obsolete, and the existing
and future potential competition.
01/01/2010 117
3.Project Identification : Selection of
product
The important dimensions which are to be probed
thoroughly before making the choice are:
Product/service, market, technology,
equipment, scale of production, location,
incentives available and time phasing.
Do you recall Porter now?
Project identification is also concerned with
collection, compilation and analysis of economic
data for the eventual purpose of locating possible
opportunities for investment and for the
development of such opportunities.
01/01/2010 118
Porter‟s 5 Forces Analysis
01/01/2010 120
3.Project Identification : Selection of
product
Breakthrough – fundamental changes in both the
structure and character of business.
Risk is greater in the ‗complementary‘ but the
most in the ‗breakthrough‘.
As the risk increases, so is the requirement of
more precise definition of the scope and nature
of the project objectives and the necessity to
select the best possible approach so as to
minimise the resource consumption and risks
and to optimise the return or gains.
01/01/2010 121
3.Project Identification : Selection of
product
• New ideas for projects are thrown up by many
situations, like magazine articles etc. Some
examples are:
The dearth of a particular product or service;
The availability of a specified type of raw
material (Presence of a skilled artisans in an
area…);
Observation of the existing processes (Eg.
A factory using a particular machine deciding to
manufacture the machine itself.)
Analysis of the performance of the existing
industries: profitability, capacity utilisation…
01/01/2010 122
3.Project Identification : Selection of
product
Examination of the inputs (availability, time
lag, transportation costs, economies of scale…),
outputs (resultant by products, wastes…)
Review of Imports and exports (trend, import
substitution…, products which have export
potential….)
The statistics given by the magazines about
the availability of various products;
Research Institutes (CSIR etc…new
technologies,, processes etc…);
01/01/2010 123
3.Project Identification : Selection of
product
The Plan document and various departmental
publications of the Government.
(Annual Publication ‗Guidelines to Industries‘ by
the Dept. of Industrial Development: Structure,
location, production performance, licensed and
installed capacity, exports, various incentives
available, future scope…)
Studies of the State Financial Institutions and
Development Agencies:
(Feasibility studies for establishment of new
industries in various areas in their states…)
01/01/2010 124
3.Project Identification : Selection of
product
Study of the reports of the different Product Group
Manufacturers‘/ Industries‘ Associations;
Analysis of Economic and social trends: (changing
habits of people to use more and more sophisticated
products, indulging in leisure activities…)
Consumption of products in foreign countries which
can fulfil the needs of the local public;
Study of sick units for possibility of revival;
Products reserved for the SSI/SME sector listed by
the Governments for their exclusive purchases.
01/01/2010 125
3.Project Identification : Selection of
product
• The entrepreneur is concerned with identifying a
particular product that can be marketed
successfully at a reasonable profit.
• A good project contains four critical elements:
―The right project at the right time at the right
place and at the right price‖.
• If the entrepreneur himself has adequate
experience in the manufacture and marketing of
certain products, then it would be to his
advantage to select the product/s, subject to the
other criteria being fulfilled.
01/01/2010 126
3.Project Identification : Selection of
product
Identifying the market:
• Out of the many project ideas thrown up from
different sources as discussed above, the market
for the product has to be identified.
• A short list may be made of only those products
which can satisfy the Michael Porter‘s 5 force
model and the Life Cycle approach ( Stages of
a product : Pioneering or Infant, Rapid Growth,
Maturity or Stabilisation and finally the Decline).
• The market can be identified from some of the
sources indicated for selecting the project.
01/01/2010 127
3.Project Identification : Selection of
product
• ―One should either identify a need and fill it or
create a need and fill it‖.
• The classification of the consumers on the basis
of income groups, demography (age groups),
industries, geographical locations, sex will
indicate the potential market.
• Seasonal factors, disposable incomes, ruling
prices, fashion also indicate the potential market.
01/01/2010 128
3.Project Identification : Selection of
product
• The study of the project idea is the starting point
of the feasibility analysis
-- which is undertaken to identify the logic of
the project, the tasks that must be performed
to achieve the objectives, the inputs, the
outputs and the process involved in each
activity.
01/01/2010 129
3. Preparation of feasibility study/report :
• Preparation of feasibility study/report :
• The stating point of a project analysis is the
establishment of objectives to be attained.
The next stage is the pre-selection stage – to
decide whether to go in for an in-depth study or
not.
• A feasibility study is an analysis of the viability of
an idea through a disciplined and documented
process of thinking through the idea from its
logical beginning to its logical end.
01/01/2010 130
3. Preparation of feasibility study/report :
01/01/2010 133
3. Preparation of feasibility study/report :
01/01/2010 134
3. Preparation of feasibility study/report :
01/01/2010 137
3. Preparation of feasibility study/report :
01/01/2010 138
3. Preparation of feasibility study/report :
01/01/2010 143
01/01/2010 145
3. Project Rating Index:
01/01/2010 146
3. Project Rating Index:
01/01/2010 150
4. Project formulation.
01/01/2010 154
4. Project formulation
In this analysis, we not only consider the
apparent direct costs and direct benefits of the
project, but also the costs which all entities
connected with the project have to bear and the
benefits which will be enjoyed by all such entities.
This strategy is now an international norm for
project formulation.
• 7.Pre Investment Analysis: The project proposal
gets a final shape at this stage.
All the results obtained from the previous stages
are consolidated and various conclusions are
arrived at to present a clear picture.
01/01/2010 155
4.Evaluation of Risks:
01/01/2010 156
4.Evaluation of Risks:
01/01/2010 157
4.Evaluation of Risks:
01/01/2010 163
4.Evaluation of Risks:
01/01/2010 165
4.Evaluation of Risks:
01/01/2010 166
4.Risk Management
01/01/2010 167
4.Risk Management
01/01/2010 168
4.Risk Management
01/01/2010 172
4.Risk Management
01/01/2010 174
4.Risk Management
01/01/2010 175
4.Risk Management
01/01/2010 176
The Risk
Management
Process
4. Preparation of Project Report:
01/01/2010 180
4. Preparation of Project Report:
01/01/2010 182
4. Preparation of Project Report:
01/01/2010 183
5.Selection of location and site of the
project:
• Selection of location and site of the project:
• Location of the site and plant are critical to the
operation of the set up in an interruption-free
manner.
• An ideal site not only saves on costs but also
enhances productivity and profits.
• The need for a new location arises when:
1. an enterprises starts a new project for
production of a product or service;
2. an existing enterprise goes for an expansion of
capacity or diversification of its product range
and the existing location cannot accommodate
additional work space;
01/01/2010 184
5.Selection of location and site of the
project:
3. a necessity arises to shift the existing plant to
another location due to various factors – like
depletion of raw materials in near by areas, or
lease of the land expires and the co. is unable
to extend the lease etc.
• A good location enables the enterprise to
function smoothly, efficiently and with minimum
cost. whereas wrong location leads to
wastage in efforts and talents of the promoters.
01/01/2010 185
5.Selection of location and site of the
project:
• According to Bethel, Atwater and Smith,
enterprise location involves three main steps
which are: 1.Selection of the region or general
area; 2. Selection of a particular community or
locality and 3. selection of the exact optimum
plant site.
• Sometimes the choice of the location is not that
of the promoters but that of the Government due
to licensing regulations (example: Chemical
Zone, Pharmaceutical Zone etc).
01/01/2010 186
5.Selection of location and site of the
project:
• Location is extremely important from another
point of view also: availability of social
infrastructure like, reasonably good housing,
schools/colleges, hospitals, recreation facilities
etc. if best talent is to be attracted and retained.
• In the case of export oriented industries, location
near an airport/sea port would be preferred.
• Power hungry industries should avoid power
deficit locations. (Example: Aluminium Industry)
01/01/2010 187
5.Selection of location and site of the
project:
• Nearness to a heavy industrialised area has its
advantages in respect of infrastructure but has
also a disadvantage in the form of spread of
unionism, even if the employees may not have
any grievance against he unit.
• The factors affecting the location of an
enterprise can be listed as follows:
01/01/2010 188
Urban Area Rural Area
•Possible to find existing •Cost of land is less &
building to house factory. scope of future expansion is
more.
•Easier to sell building •Healthy & pleasant
later. atmosphere.
•Power & water easily •Cheapness of land allows
available. freedom for most economic
design for building.
•Good market for small •Lesser taxes & restriction.
mfrs.
•Housing, banks, fire •Housing can be
protection, railways & provided by pvt.
education available. Enterprise or local
authority.
•Transportation is easy & •Road or rail connection
cheap. can be arranged easily.
•Workers find easy to change •Less labour trouble &
job & area has good labour labour is cheap.
market.
•Repairing facility available
with existing industries.
•Opportunity to exchange
knowledge from nearby
industries.
Urban area Rural area
•Climate is not healthy due •Sufficient power & water
to congestion. may not be available.
•Arranging equipment is •Enough facilities for
not possible due to limited expansion may not be
area. available.
•High taxes. •No recreational facilities.
•Cost of land is high & •Transport & housing
scope of expansion is less. facilities may not be
satisfactory.
•More problems about •Government facilities may
labour & employee not be sufficient.
relations
•Cost of building factory •Skilled workers are not
will be high. easily available.
•Higher wages of labour •Educational facilities may
due to high standard of not be available.
living.
Selection of Region Selection of Community/location
Availability of RM Availability of labour
Nearness to market Civic amenities for workers
Availability of power and fuel Existence of complementary and
competing industries
Transport Banking/Finance and Research
facilities
Suitability of climate Availability of water and fire fighting
facilities
Government policy Local taxes and restrictions
Competition among states Momentum of an early start
Meteorological conditions and Communication facilities
topography
Cultural affinity and harmony
Religious and social institutions
Educational environment
Historical factors
01/01/2010 Political stability 192
Selection of site Optimum selection of site
Soil, size and topography Optimum site is selected on the basis
Waste disposal of a comparative economic survey of
Price of land, right and title of the land the alternative sites in aquestion.
Potential for expansion
Commercial services/Communication
facilities
Health of locality, good scenery
Statutory considerations
Flood and drought experience
Attitude of local people
State Assistance
01/01/2010 193
5.Selection of location and site of the
project:
• Generally speaking, if the value addition is low,
then the location may be near the source of RM,
(For e.g.: Textile and sugar mills in Maharashtra,
Sugar factories in U.P, Marble mfrg. in Jaipur,
Sandal Wood products in Mysore, fish-canning &
salt pans near coast, Export of Alphonso
mangoes from Ratnagiri.)
• --but if the value addition is high then the
location may be chosen considering the other
more important critical factors since
transportation costs can be absorbed.
01/01/2010 194
5.Selection of location and site of the
project:
• A recent survey found that most of the SMEs had
their location near their residence and had ignored
the economics of the location of the industry. More
than 50% of these SMEs had failed within five
years.
• There are two types of measures that may be
adopted by the Govt. to influence the location: They
are: Positive measures and Negative measures.
• POSITIVE measures encourage growth by various
inducements extended to the industrialists to setup
their projects in certain specified areas.
• NEGATIVE measures impose restrictions on the
location of projects in certain congested areas.
01/01/2010 195
5.Selection of location and site of the
project:
• Both sets of measures are necessary for the
effective location policy.
• If more resources are invested in one region,
less resources will be available for investment in
other regions.
• In cities with population of more than 1 million,
there is no requirement of obtaining industrial
approvals from central government, if the plant is
to be located beyond 25 Kms. of periphery of the
cities.
01/01/2010 196
5.Selection of location and site of the
project:
• Weber‘s Theory of Industrial Location: (Alfred
Weber: was a professor at the University of
Heidelberg from 1907 to 1933):
• Two types of materials used in an industry:
• Ubiquitous: available everywhere- like brick,
clay, water etc.
• Localised materials (which are available only in
certain localities –like ores minerals etc.): again
these are of two types : weight losing and weight
gaining.
01/01/2010 197
5.Selection of location and site of the
project:
• Weight losing materials lose considerable weight
during the process of manufacture- like, coal.
• Such industries should be located near the
source of RM
• Weight gaining materials are those which
become heavier than the raw materials after
manufacture- for example, water added to the
raw material to make the final product. and
require transport.
• Such industries should be located near the
market.
01/01/2010 198
5.Selection of location and site of the
project:
• Industries get redistributed in different localities
due to the ‗deglomerative‘ forces.
• „Agglomeration‟ is the phenomenon of spatial
clustering, or a concentration of firms in a
relatively small area.
• The clustering and linkages allow individual
firms to enjoy both internal and external
economies.
• Auxiliary industries, specialized machines or
services used only occasionally by larger firms
tend to be located in agglomeration areas, not
just to lower costs but to serve the bigger
populations.
01/01/2010 199
5.Selection of location and site of the
project:
• „Deglomeration‟ occurs when companies and
services leave because of the diseconomies of
industries‘ excessive concentration.
• Firms who can achieve economies by increasing
their scale of industrial activities benefit from
agglomeration.
• However, after reaching an optimal size, local
facilities may become over-taxed, lead to an
offset of initial advantages and increase in
Project cost
• Then the force of agglomeration may eventually
be replaced by other forces which promote
deglomeration.
01/01/2010 200
5.Selection of location and site of the
project:
• His theory has five assumptions.
• His first assumption is known as the isotropic
plain assumption. This means the model is
operative in a single country with a uniform
topography, climate, technology, economic
system.
• His second assumption is that only one finished
product is considered at a time, and the product
is shipped to a single market.
• The third assumption is raw materials are fixed
at certain locations, and the market is also a
known fixed location.
01/01/2010 201
5.Selection of location and site of the
project:
• The fourth assumption is that labor is fixed
geographically but is available in unlimited
quantities at any production site selected.
• The final assumption is that transport costs are a
direct function of weight of the item and the
distance shipped.
• Selection of the most Economic site: According
to Kimball, ―the most advantageous location is
that at which the cost of gathering material and
fabricating it plus the cost of distributing the
finished product to the customer will be
minimum‖.
01/01/2010 202
Selection of Actual Site:
01/01/2010 204
5.Selection of location and site of the
project:
• It influences the operational costs, boosts the
morale of the workers and ensures maximum
supervision.
• It must be flexible so that it may be easily adapted
to technological change, modernization,
diversification and expansion with minimum cost
and time.
• Factors to be considered –
• Knowledge of what is involved in the activity
concerned, such as the nature of materials to be
handled………
01/01/2010 205
5.Selection of location and site of the
project:
• ,………. their quality and quantity, the process
they have to be subjected to, inspection and
quality control at various stages, assembly
procedures, packing, etc.
• The sequence of operations
• Movement of materials from one stage to
another should be minimum.
• Plant layout – is a floor plan for determining and
arranging the desired machinery and equipment
of a plant in one of the best place.......
01/01/2010 206
5.Selection of location and site of the
project:
• …….. to permit the quickest flow of materials at
the lowest cost and with the least amount of
handling in processing the product from the
receipt of the raw materials to the shipment of
the finished products.
• It not only covers the initial layout of machines
and other facilities but encompasses
improvement in, or revision of, the existing
layout in the light of subsequent developments
in the methods of production.
01/01/2010 207
CLIMATIC CONDITIONS MARKET/VENDORS
GAS
HOUSE FOR LABOURERS ELECTRICITY
WIRES
WATER
PLANT REGION
WASTE DISPOSAL
BANK
LOCALITY
INPUT
(a.) Net worth OUTPUT
(b.) Size of assets (a.) Volume of
(c.) Employment output
(d.) Raw materials (b.) Value of
required output
(e.) Power needed
(f.) Number and capacity
of plant
01/01/2010 209
5.Selection of location and site of the
project:
Factors for evaluating Plant Layout:
• Production technology and Product-mix
• Efficient, economic and uninterrupted flow of
human and materials resources
• Proper space for maintenance
• Future expansion / diversification of the project
• Safety precautions particularly when explosive
or bulky material is required to be handled
01/01/2010 210
5.Selection of location and site of the
project:
• Proper lighting and ventilation
• Proper layout of utilities and services and
provisions for effluent disposal
• Effective supervision of work
• Proper storage and stacking space
Importance of Layout:
• Effective use of available area
• Minimization of production delays
• Improved quality control
• Minimum equipment investment
• Avoidance of bottlenecks
01/01/2010 211
5.Selection of location and site of the
project:
• Better production control and supervision
• Improved utilization of labour
• Improved employee morale
• Maximization of production
• Avoidance of unnecessary and costly changes
• Increased revenues and profits
• Success of the enterprise
01/01/2010 212
5.Selection of location and site of the
project:
Factors affecting Factory Layout:
• Nature of product (light or heavy products)
• Volume of production (high or low)
• Materials handling
• Type of equipment (specifications of machinery
and equipment–general / specialized machines)
• Factory building
• System of manufacture (i.e. process of
manufacture)
• Lighting and ventilation
01/01/2010 213
5.Selection of location and site of the
project:
• Service facilities (canteen, drinking water, toilets,
first aid, fire escapes, etc)
Materials Handling:
• ―The right equipment, at the right position, to be
worked in the right manner for completing the
manufacturing process in the SHORTEST
possible time.
• This includes that the layout should be such that
the new materials, stores, intermediate stores
and work places should be interlinked so that
the production may flow uninterruptedly.
01/01/2010 214
5.Selection of location and site of the
project:
• A good layout not only improves material
handling operations but also increases the
production and productivity per employee.
• Handling adds nothing to the value of the
product, but only to the cost.
Advantages of Materials Handling:
• Reduced labour cost
• Increased capacity of existing building
• Better machine utilization
01/01/2010 215
5.Selection of location and site of the
project:
• Less capital tied-up in work-in-progress
• Easier stock control
• Less fatigue for operations
• More efficient production control
• Better inspection and control of quality
• Improved safety
01/01/2010 216
5.Selection of location and site of the
project:
In short a Good Plant layout can be defined as:
• ―a floor plan for determining and arranging the
desired machinery and equipments of plant,
whether established or contemplated in the best
place, permit the quickest flow of material at the
lowest cost and with the least amount of handling
in processing the product from the receipt of the
raw material to the shipment of finished goods‖
‘S’ Type Combination of ‘T’ and ‘U’ Type
R
FG
R
FG
R
FG
Third Floor
Second Floor
First Floor
FG
FG
Ground Floor R
R
6.Policies of Central and State
Governments towards location, Legal
aspects of Project management
As per World Economic Forum‟s Global
Competitiveness Review 2010-11: 139 countries
compared.
Parameter Rank -India Rank-China
Quality of Education System 39 – 4.3/7 53 – 4/7
Quality of Management Schools 23 – 5.1/7 63 – 4.2/7
Availability of specialised research and 51 – 4.4/7 50 – 4.4/7
training services
Intensity of local competition 30 – 5.4/7 19 – 5.6/7
Extent of market dominance 26 – 4.7/7 23 – 4.8/7
Extent and effect of taxation 36 – 4/7 29 – 4.1/7
Number pf procedures required to start a 121 -13 126 -14
business
01/01/2010 220
Time required-no. of days- to start a business 93 - 30 108 - 37
Parameter Rank - Rank -
India China
Prevalence of Trade barriers 96 – 4.2/7 69 -4.6/7
Prevalence of foreign ownership 81 – 4.6/7 103 -4.4/7
Business impact of rules on FDI 46 – 5/7 18 – 5.4/7
Burden of customs procedures 81 – 4/7 46 – 4.5/7
Pay and productivity 61 – 4/7 15 – 4.7/7
Reliance on Professional 49 – 4.7/7 50 – 4.7/7
Management
Brain Drain 34 – 4.3/7 37 – 4.3/7
Availability of Financial Services 45 – 5.1/7 71 – 4.6/7
Financing through local Equity 10 – 4.7/7 52 – 3.8/7
Market
Ease of access to loans 39 – 3.3/7 51 – 3/7
Parameter Rank - Rank -
India China
Venture Capital Availability 31 – 3.1/7 27 – 3.3/7
Restriction on Capital Flows 75 – 4.4/7 123 – 3.3/7
Soundness of Banks 25 – 5.8/7 60 – 5.3/7
Regulation of Securities Exchanges 15 – 5.3/7 61 – 4.4/7
Availability of latest technologies 41 – 5.6/7 94 – 4.4/7
Domestic Market Size Index 4 – 6.1/7 2 – 6.6/7
Foreign Market Size Index 4 – 6.2/7 1 – 7/7
GDP (PPP) 4 2
Exports as a percentage of GDP 117 – 20.6 88 – 27.9
Business – Local Supplier Quality 60 – 4.6/7 54 – 4.7/7
Nature of (International) 61 – 3.4/7 48 – 3.7/7
Competitive advantage
Parameter Rank - Rank -
India China
Production Process sophistication 43 – 4.3/7 55 – 3.9/7
Quality of Scientific Research 30 – 4.7/7 39 – 4.3/7
Institutions
Availability of Scientists and 15 – 5.2/7 35 – 4.6/7
Engineers
Utility Patents per million population 59 – 0.6 51 – 1.2
01/01/2010 227
6.India .. At present:
• All the above are statements of facts and made
possible by the proactive steps taken by the
Govt. of India by liberalising and globalising the
Indian economy.
01/01/2010 228
6.Industrial Policy..
DIPP: Established in 1995 -- Responsible for
formulation and administration of industrial
policy.
Functions:
1. Monitoring industrial growth – infrastructure,
technology, environment etc
2. Approval of Foreign Technology collaborations
and forming policies
3. Formulation of FDI policy
4. Promotion of Non Resident Investment
5. Policies related to IPR, Trademark, Patents etc
6. Development of Industrial corridors as well as
backward states
6.Industrial Policy..
Main features of the Industrial Policy of Govt. of India:
Objectives:
• to maintain a sustained growth in productivity;
• to enhance gainful employment;
• to achieve optimal utilisation of human resources;
• to attain international competitiveness and
• to transform India into a major partner and player
in the global arena.
Policy focus is on :
• Deregulating Indian industry;
• Allowing the industry freedom and flexibility in
responding to market forces and
• Providing a policy regime that facilitates and
fosters growth of Indian industry.
01/01/2010 230
6.Industrial Policy..
Policy measures:
• Some of the important policy measures announced
and procedural simplifications undertaken to pursue
the above objectives are as under:
• i) Liberalisation of Industrial Licensing Policy
• The list of items requiring compulsory licensing is
reviewed on an ongoing basis. At present, only five
industries are under compulsory licensing mainly on
account of environmental, safety and strategic
considerations.
• (1.Alcoholics drinks; 2.Cigarettes and tobacco
products; 3.Electronic Aerospace and Defence
equipment; 4.Explosives; 5.Hazardous Chemicals
such as Hydrocyanic Acid, Phosgene, Isocyanates
and Di-Isocyanates of Hydrocarbon and
derivatives)
01/01/2010 231
6.Industrial Policy..
At present, industrial license is required only for the
following: -
1. Industries retained under compulsory licensing
2. Manufacture of items reserved for small scale
sector by larger units
3. When the proposed location attracts locational
restriction
Similarly, there are only three industries reserved for
the public sector.
• (1.Arms & Ammunition and the allied items of
defence equipments, defence air-crafts and
warships; 2.Atomic Energy; 3.Railway transport)
• ii) Introduction of Industrial Entrepreneurs‘
Memorandum (IEM)
01/01/2010 232
6.Industrial Policy..
• Industries not requiring compulsory licensing are to
file an Industrial Entrepreneurs‘ Memorandum (IEM)
to the Secretariat for Industrial Assistance (SIA). No
industrial approval is required for such exempted
industries. Amendments are also allowed to IEM
proposals filed after 1.7.1998.
• iii) Liberalisation of the Locational Policy
• A significantly amended locational policy in tune with
the liberalised licensing policy is in place:
• No industrial approval is required from the
Government for locations not falling within 25 kms of
the periphery of cities having a population of more
than one million except for those industries where
industrial licensing is compulsory.
01/01/2010 233
6 6.Industrial Policy..
• Non-polluting industries such as electronics,
computer software and printing can be located
within 25 kms. of the periphery of cities with
more than one million population.
• Permission to other industries is granted in such
locations only if they are located in an industrial
area so designated prior to 25.7.91. Zoning and
land use regulations as well as environmental
legislations have to be followed.
01/01/2010 234
6.Industrial Policy..
• iv) Policy for Small Scale Industries
• Reservation of items of manufacture exclusively
for the small scale sector forms an important
focus of the industrial policy as a measure of
protecting this sector. Since 24th December
1999, industrial undertakings with an investment
upto rupees one crore are within the small scale
and ancillary sector.
01/01/2010 235
6.Industrial Policy..
• A differential investment limit has been adopted
since 9th October 2001 for 41 reserved items
where the investment limit upto rupees five crs. is
prescribed for qualifying as a small scale unit.
The investment limit for tiny units is Rs. 25 lakhs.
• 749 items are reserved for manufacture in the
small scale sector. All undertakings other than
the small scale industrial undertakings engaged
in the manufacture of items reserved for
manufacture in the small scale sector are
required to obtain an industrial license and
undertake an export obligation of 50% of the
annual production.
01/01/2010 236
6.Industrial Policy..
• This condition of licensing is, however, not
applicable to those undertakings operating
under 100% Export Oriented Undertakings
Scheme, the Export Processing Zone (EPZ) or
the Special Economic Zone Schemes (SEZs).
• V) Non-Resident Indians Scheme
• The general policy and facilities for Foreign
Direct Investment as available to foreign
investors/company are fully applicable to NRIs
as well.
01/01/2010 237
6.Industrial Policy..
• In addition, Government has extended some
concessions specially for NRIs and overseas
corporate bodies having more than 60% stake by
the NRIs.
• These inter-alia includes (i) NRI/OCB investment
in the real estate and housing sectors upto 100%
and (ii) NRI/OCB investment in domestic airlines
sector upto 100%.
• NRI/OCBs are also allowed to invest upto 100%
equity on non-repatriation basis in all activities
except for a small negative list. Apart from this,
NRI/OCBs are also allowed to invest on
repatriation/non-repatriation under the portfolio
investment scheme.
01/01/2010 238
6.Industrial Policy..
• vi) Electronic Hardware Technology Park
(EHTP)/Software Technology Park (STP)
scheme
• For building up strong electronics industry and
with a view to enhancing export, two schemes
viz. Electronic Hardware Technology Park
(EHTP) and Software Technology Park (STP)
are in operation.
• Under EHTP/STP scheme, the inputs are
allowed to be procured free of duties.
01/01/2010 239
6.Industrial Policy..
• The Directors of STPs have powers to approve
fresh STP/EHTP proposals and also grant post-
approval amendment in respect of EHTP/STP
projects as have been given to the Development
Commissioners of Export Processing Zones in
the case of Export Oriented Units.
• All other applications for setting up projects
under these schemes, are considered by the
Inter-Ministerial Standing Committee (IMSC)
Chaired by Secretary (Information Technology).
The IMSC is serviced by the SIA.
01/01/2010 240
6.Industrial Policy..
• vii) Policy for Foreign Direct Investment (FDI)
• Promotion of foreign direct investment forms an
integral part of India‘s economic policies.
• The role of foreign direct investment in accelerating
economic growth is by way of infusion of capital,
technology and modern management practices.
• The Department has put in place a liberal and
transparent foreign investment regime where most
activities are opened to foreign investment on
automatic route without any limit on the extent of
foreign ownership.
01/01/2010 241
6.Industrial Policy..
Some of the recent initiatives taken to further
liberalise the FDI regime, inter-alia, include:
• opening up of sectors such as Insurance (upto
26%);
• development of integrated townships (upto
100%);
• defence industry (upto 26%);
• tea plantation (upto 100% subject to divestment
of 26% within five years of FDI);
01/01/2010 242
6.Industrial Policy..
• Enhancement of FDI limits in private sector
banking,
• allowing FDI up to 100% under the automatic
route for most manufacturing activities in SEZs;
• opening up B2B e-commerce; Internet Service
Providers (ISPs) without Gateways;
• electronic mail and voice mail to 100% foreign
investment.
01/01/2010 243
FDI Restrictions
FDI up to 100% is allowed under the automatic
route in all activities/sectors except the following:
1. Sectors prohibited for FDI
2. Activities/items that require an industrial license
3. Proposals in which the foreign collaborator has
an existing financial/technical collaboration in
India in the same field
4. Proposals for acquisitions of shares in an
existing Indian company in financial service
sector and where SEBI (substantial acquisition
of shares and takeovers) regulations, 1997 is
attracted
FDI Restrictions….
01/01/2010 247
6.Industrial Policy..
01/01/2010 249
6.DIPP: Annual Report 2007 – 08:
01/01/2010 250
6.DIPP: Annual Report 2007 – 08…
• The role and functions of the Department of
Industrial Policy and Promotion (DIPP) primarily
include: -
• Formulation and implementation of industrial
policy and strategies for industrial development
in conformity with the developmental needs and
national objectives, in order to make the Indian
industry internationally competitive;
• Monitoring and stimulation of industrial growth in
general, and performance of industries
specifically assigned to it in particular and
guidance in the creation of an enabling
environment, infrastructure, technology transfer/
collaborations on all industrial and technical
matters;
6.DIPP: Annual Report 2007 – 08…
• Approval of foreign technology collaborations at
enterprise level and formulation of policy
parameters for the same, for enhancing
productivity, with reference to international
benchmarking;
• Formulation of Foreign Direct Investment (FDI)
Policy and amendments thereto as well as
promotion and facilitation of direct foreign and
non-resident investment in industrial and service
projects;
• Association, as nodal department, for
investment related issues in Bilateral/regional
economic Cooperation Agreements;
6.DIPP: Annual Report 2007 – 08…:
• Formulation of policies relating to Intellectual
Property Rights in the fields of Patents,
Trademarks, Industrial Designs and
Geographical Indications of Goods and
administration of regulations and rules made
thereunder;
• Administration of Industries (Development &
Regulation) Act, 1951;
• Promotion of Industrial development of
industrially backward and remote, hilly and
inaccessible areas of the Special category
States of ……
01/01/2010 253
6.DIPP: Annual Report 2007 – 08…:
01/01/2010 254
6.DIPP: Annual Report 2007 – 08:
01/01/2010 256
6.DIPP: Annual Report 2007 – 08…:
• It also promotes the adoption of quality
standards relating to the ISO 9000/14000 series
through the accreditation services provided by
National Boards for Certifying Bodies and
Auditors and Trainers under the Quality Council
of India, which has been certified by
international accreditation bodies.
• Schemes For Industrial and Infrastructure
Development:
01/01/2010 257
6.DIPP: Annual Report 2007 – 08..:
• This Department administers the Industrial
Infrastructure Upgradation Scheme (IIUS) for
enhancing the competitiveness of the domestic
industry by providing quality infrastructure
through public-private partnership in selected
functional clusters. Central assistance up to 75%
of the project cost subject to a maximum of Rs.
50 crs. is provided under the Scheme
• FDI Promotion Initiatives : Several steps have
been initiated to facilitate increased FDI inflows
which include, inter-alia, the following:
01/01/2010 258
6.DIPP: Annual Report 2007 – 08:
• (a) On the policy front, while our FDI policy is
already very liberal, the policy is being further
progressively rationalised.
• (b) On the investment promotion front, the
Department organises Destination India events
in association with CII and FICCI.
• (c) The Foreign Investment Implementation
Authority (FIIA) has been activated towards
speedy resolution of investment related
problems.
01/01/2010 259
6.DIPP: Annual Report 2007 – 08:
01/01/2010 262
6.DIPP: Annual Report 2007 – 08:
01/01/2010 263
6.Rehabilitation and Resettlement Policy:
01/01/2010 264
6.Rehabilitation and Resettlement Policy:
01/01/2010 265
6.Rehabilitation and Resettlement Policy:
01/01/2010 266
6.Rehabilitation and Resettlement Policy:
01/01/2010 268
6.National Design Policy:
01/01/2010 269
6.National Design Policy:
global positioning and branding of Indian
designs
well defined and managed regulatory,
promotional and institutional framework raising
Indian design education to global standards of
excellence.
making India a major hub for exports and
outsourcing of designs and
creation of awareness among manufacturers
and service providers, particularly SMEs and
cottage industries
01/01/2010 270
6.National Design Policy:
• Action plan :
Setting up of specialised Design Centres or
―Innovation Hubs‖ for sectors such as
automobile and transportation, Jewellery,
leather, soft goods, electronics / IT hardware
products, toys & games which will provide
common facilities and enabling tools like rapid
product development, high performance
visualisation, etc.
Formulation of a scheme for setting up Design
Centres/Innovation Hubs
01/01/2010 271
6.National Design Policy:
Preparation of a mechanism for recognising and
awarding industry achievers in creating a brand
image
Encouraging Indian firms and institutions to
develop strategic alliances with design firms and
institutions abroad to gain access to technology
and know-how improving Indian design.
four more National institutes of Design on the
pattern of NID will be set up in different regions
of the country
01/01/2010 272
6.National Design Policy:
Encouraging the teaching of design in vocational
institutes oriented to the needs of Indian industry
Organising workshops and seminars
encourage and facilitating a culture for creating
and protecting intellectual property in the area of
designs
01/01/2010 273
6.Ultra mega power project (UMPP):
01/01/2010 274
6.Now some of the States:
01/01/2010 276
6.NEIIPP
01/01/2010 277
6.NEIIPP
01/01/2010 278
6.NEIIPP
01/01/2010 279
6.Maharashtra….Incentives:
01/01/2010 280
6.Maharashtra….Incentives:
01/01/2010 281
6.Maharashtra :Policies and Incentives
01/01/2010 282
6.Maharashtra :Policies and Incentives
01/01/2010 285
6.Gujarat
01/01/2010 286
6.Gujarat
01/01/2010 287
6.GUJARAT INDUSTRIAL POLICY - 2000
(Growth Policy)
• Aims to achieve sustainable industrial
development
Makes the State more attractive to accelerate
further the flow of investment
Proposes to promote IT and knowledge based
industries
Enhanced exports from industrial units targeted
Encourages the development of small scale
industries and service sector industries
01/01/2010 288
GUJARAT INDUSTRIAL POLICY - 2000
(Growth Policy)
Promotes industries in backward areas
Assistance for activities like market
development and promotion
Upgradation of entrepreneurial skill of first
generation entrepreneurs
Asset management fund introduced to cover
debt and equity fund for financial assistance to
infrastructure projects
Encourages setting up of private sector industrial
parks
01/01/2010 289
6.Schemes under Gujarat Industrial
Policy - 2000
01/01/2010 290
6.Gujarat Industrial Policy – 2000,.. Power
Policy:
Assistance for Research & Development and
Patent Registration
Amendment in Financial Assistance for
upgradation of quality in SSI/ Medium & Large
Scale Sector
Declaration of Backward Talukas eligible for
benefits
• POWER POLICY (HIGHLIGHTS)
building up adequate capacity in generation,
transmission and distribution
01/01/2010 291
6.Gujarat Industrial Policy – 2000,.. Power
Policy:
Achieving optimum utilisation of existing
equipments
Rationalizing the tariff structure
Improving quality of services thereby achieving
cost effectiveness
Striving for energy conservation
Encouraging power generation utilising non-
conventional sources
01/01/2010 292
6.PORT POLICY --HIGHLIGHTS
01/01/2010 293
6.PORT POLICY --HIGHLIGHTS
01/01/2010 294
6.IT Policy 2006 – 2011
01/01/2010 295
6.Tamilnadu:
01/01/2010 297
6.Tamilnadu:
01/01/2010 298
6.Tamilnadu:
01/01/2010 299
6.Tamilnadu:
01/01/2010 300
6.Tamilnadu:
01/01/2010 301
6.Tamilnadu:
01/01/2010 303
6. Legal aspects of Project Management:
01/01/2010 304
6. The Acts:
• The factories act, 1948
• Income tax act, 1981
• Central sales tax & state sales tax acts
• The Sale of Goods Act;
• Acts relating to Life and General Insurance;
• The Insolvency Act;
• The Negotiable Instruments Act;
• The Laws relating to Transports _Carriage of
Goods Act;
• The laws relating to Sales Tax, Central
Excise and Customs;
01/01/2010 305
6. The Acts:
• The Foreign Exchange Management Act (FEMA);
• Major Port Trust Act;
• Transfer of Property Act;
• The laws relating to mortgages;
• The laws relating to land acquisition and Land
Disputes; Land Ceiling Act;
• Labour Legislations –Payment of wages act, 1936;
Minimum wages act, 1948; Employees Providend
Fund Act, 1952; Pension Funds/Gratuity;
Employees State Insurance Act, 1948; Industrial
Disputes Act,
01/01/2010 306
6. The Acts:
• Legislations concerning Environmental Pollution;
• The Companies Act;
• And many more which are relevant to the
activities that are undertaken in the execution of
the Project.
The most important of all is the Contract Act,
which pervades or touches upon every
business activity.
01/01/2010 307
6. Contract Act
• Some of the situations arising out of contracts
are more specifically dealt in other Acts – like
the Sale of Goods Act, Transfer of Property Act.
Etc.
• Hence a thorough understanding of the
Contract Act is a must for a Project Manager.
Law of Agency: The Project Manager should
remember that he is an Agent of the owners of
the Project and is answerable to them for his
actions even when they are bona-fide.
01/01/2010 308
6. Contract Act
• An agent cannot do what the principal himself
cannot do.
• In case of emergencies, the Project Manager (
as the agent) has the authority to do every
lawful thing necessary for the purpose of
protecting his principal from loss, as would be
done by a person of ordinary prudence would
do to protect his interests in similar
circumstances.
01/01/2010 309
6. Contract Act –IDR Act
01/01/2010 310
6. The IDR Act
01/01/2010 312
6.The Factories Act, 1948
01/01/2010 313
6.The Factories Act, 1948
01/01/2010 314
6.The Factories Act, 1948
01/01/2010 315
6.The Factories Act, 1948
01/01/2010 316
6.The Factories Act, 1948
01/01/2010 317
6.The Factories Act, 1948
01/01/2010 319
6.Labour Laws:
01/01/2010 320
6.Labour Laws:
01/01/2010 321
6.Labour Laws:
01/01/2010 322
6.Labour Laws:
01/01/2010 323
6. Sales of Goods Act
01/01/2010 324
6. Sales of Goods Act
01/01/2010 325
6. Sales of Goods Act
01/01/2010 326
6. Carriages of Goods Act
Carriage of Goods Act: A contract of carriage of
goods is a contract entered into between
parties for transportation of goods from the point
of dispatch to the point of destination. Since the
goods meant for the project have to be
transported the Project Manager has to be
aware of the implications of the duties and
responsibilities of the sending and the receiving
parties.
01/01/2010 327
6. Foreign Exchange Management Act
(FEMA)
Foreign Exchange Management Act (FEMA):
When goods are exported or imported or any
payments are remitted abroad towards royalty
or fees paid for technical drawings/designs, or
for the foreign architects/technicians towards
their compensation, FEMA comes into picture
and care has to be taken to see that there are
no violations.
Here the Bankers who deal with such
transactions will guide the Project Manager
properly. But part of the responsibility falls on
the customer also.
01/01/2010 328
6. Negotiable Instruments act (NI Act)
01/01/2010 329
6. Legal aspects of Project Management:
01/01/2010 332
6. Legal aspects of Project Management:
01/01/2010 333
6. Legal aspects of Project Management:
01/01/2010 334
7.Financial analysis-Profitability
Analysis.
• Financial analysis refers to the process of
obtaining relevant economic information about a
project in order to establish its financial viability.
It is undertaken as one of the feasibility analyses
in project formulation.
• Financial analysis can be defined as the
process of discovering economic facts about
an enterprise and or a project on the basis of
an interpretation of financial data. It also
looks at the capital cost, operations cost and
operating revenue.
01/01/2010 335
7.Financial analysis-Profitability
Analysis.
• Most of the data required for financial analysis are
obtained from market analysis, technical analysis
and cost analysis.
• Then the data is converted and presented in the
form of Proforma Balance
Sheet, Proforma Operating Statement and Cash
Flow statements.
• Financial analysis primarily deals with the
interpretation of the financial data incorporated in
the Proforma financial statements and the
presentation of the economic facts in such a form as
to make a comparative evaluation/appraisal of
projects.
01/01/2010 336
7.Financial analysis-Profitability
Analysis.
• Financial analysis can provide insight into two
important areas of management – Return on
Investment and soundness of the company‘s
financial position.
• A financial analysis reveals where the company
stands with respect to profitability, liquidity,
leverage and an efficient use of its assets.
01/01/2010 337
7.Financial analysis-Profitability
Analysis.
• In order to complete the financial profile of a
project, it is also necessary to evaluate the
operational strategy and the investment strategy
of the project. The break even analysis is used
to explain its operational characteristics.
• The financial strategy is evaluated in terms of
financial leverage.
01/01/2010 338
7.Financial analysis-Profitability
Analysis.
• The parties who have a stake in the financial
results of a company are: Creditors
Potential suppliers debenture holders
credit institutions like banks industrial
finance corporations potential investors
employees trade unions important
customers economists investment analysts
taxation authorities Govts. et al. They all
look at the financial statements from different
angles.
01/01/2010 339
7.Financial analysis-Profitability
Analysis.
• The principal financial tools that are relevant in this
context are: trend analysis variable analysis
Ratio analysis Funds Flow analysis Break -
even analysis Common size analysis Cash
Budgets
• Investment criteria: NPV; Benefit Cost Ratio; IRR;
Pay Back period; Accounting Rate of Return.
• The NPV of a project is the sum of the present
values of all the cash flows-- positive as well as
negative—that are expected to occur over the life
of the project:
01/01/2010 340
NPV
01/01/2010 341
NPV
• The NPV represents the net benefit over and
above the compensation for time and risk.
• Hence the decision rule associated with the NPV
criterion is :
--Accept the project if the NPV is +ve and
--Reject if the NPV is –ve.
(If NPV is 0, then the result is indifferent i.e. the
selection of the project has to depend on other
factors, since the project is neither a profitable
nor a losing proposition)
01/01/2010 342
NPV
Properties of the NPV Rule:
• Value of a firm
= PV of existing projects + NPV of future
projects
• When a firm terminates an existing project which
has a negative value, the firm‘s value increases
by that amount.
• On the same lines, if a new project with an
expected negative NPV is undertaken, the
value of the firm decreases by the same amount.
01/01/2010 343
NPV
• When a firm divests an existing project, the
value of the firm increases or decreases as the
case may be by the same amount of positive or
negative difference of the price received over
the expected NPV.
• Conversely when a firm acquires an existing
project, its value will increase or decrease as the
case may be by the same amount of negative or
positive difference of the price paid over the
expected NPV;
01/01/2010 344
NPV
• Even if a firm takes up new projects with positive
NPV, the value of the firm may decrease if it falls
below the expectations of the investors.
• The NPV rule assumes that the cash flows
that occur in between the initial outflow and
the termination of the project are reinvested
at the cost of capital.
01/01/2010 345
NPV
01/01/2010 351
Benefit Cost Method:
01/01/2010 353
Internal Rate of Return (IRR):
01/01/2010 354
Internal Rate of Return (IRR):
01/01/2010 355
Internal Rate of Return (IRR):
01/01/2010 357
NPV and IRR
NPV
45000
Discount rate
15
01/01/2010 358
NPV and IRR
01/01/2010 359
IRR
01/01/2010 360
IRR
01/01/2010 361
IRR
NPV
01/01/2010 362
IRR
01/01/2010 363
IRR
• Example: Two projects A with the cash flows:
-10000 and 20000; IRR 100% and NPV at r=
12: Rs. 7,857. and B with cash flows : -50000
and 75000; IRR 50% and NPV: Rs. 16964.
• When you look at the same projects with
incremental cash flows, the IRR returns a
better figure.
• In the above case, the incremental cash
flows in the case of Project B are: -40000
and 55000., IRR = 37.50%, which is far
above the cost of capital 12 %. Hence the
project can be accepted.
01/01/2010 364
IRR
• Finally we can conclude that when we consider
two mutually exclusive projects, it is better to rely
on the NPV criterion.
• The case of different short and long term
interest rates:
• Recall that the discount rates ‗r‘ used in the
denominator for the years refer to the costs of
capital for the respective years.
• If the IRR is used as a decision criterion, then if
the IRR> the opportunity cost, then the project
can be accepted.
01/01/2010 365
IRR
• Which opportunity cost - if it changes from year
to year?
• So we have to work out a weighted average of
various rates and then compare it with the IRR.
• So in such cases, to avoid complications, the
NPV method is preferred.
• The meaning of IRR:
(1) The IRR represents the return on the
un-recovered investment balance in the project
(at the same rate for the entire project life).
01/01/2010 366
IRR
(2) the IRR is the rate of return earned on the
initial investment made in the project (at the
same rate of reinvestment of intermediate flows).
• Since the second is not always possible we may
say that the first mentioned meaning is more
realistic.
• See the example in book PC 8.16-17
01/01/2010 367
IRR
• The desirable qualities of IRR: Managers
look to the rate of return for their investments.
• Samuel Weaver says: ―The resulting IRR
can be compared to the expected inflation,
the current borrowing rates, the cost of
capital, an equity portfolio‘s return and so on‖.
• Further NPV can be calculated if you know
the exact discounting rate, but still may
vaguely, whereas the IRR arrives at it and so
can be compared with the desired (even if not
definitely known) discount rate.
01/01/2010 368
IRR
• The Modified IRR (MIRR): Whether the
shortcomings of the regular IRR can be
overcome?
• Yes by using the MIRR.
• It is that percentage at which the costs
discounted at the cost of capital are
compounded over the project life to produce the
returns.
• See the following example for clarification:
• The cash flows of a project are : -120, -80,
20,60,80,100,120 and the cost of capital = 15%
01/01/2010 369
IRR
• Step No. 1. Calculate the present value of costs
using the formula:
• PVC + (t= 0 to n) Cash flowt /(1+r)t i.e. 120 +
80/1.15 = 189.6 assuming a cost of capital of
15%.
• Step no.2: Calculate the terminal value TV of
the cash inflows using the following equation:
• TV = (t = 0 to n) Cash in flowt (1+r)n-1 i.e.
:20*(1.15)4 + 60*(1.15)3……+ 120 = 467.
01/01/2010 370
IRR
• Step no. 3: Solve the following equation to find
MIRR:
• PVC = TV / (1+MIRR)n.. In this case it is:
189 = 467/(1+MIRR)6.
• Thus MIRR 0.162 or 16.2%. i.e. the cost of the
project is giving a return at 16.2% compounded
through the life of the project of 6 years.
01/01/2010 371
IRR
• Evaluation: The MIRR is superior since the
MIRR assumes that the project cash flows are
reinvested at the cost of capital whereas the
regular IRR assumes that the cash flows are
reinvested at the project‘s IRR. Secondly, the
problem of multiple rates does not exist.
• So, in conclusion we can say that if two mutually
exclusive projects have the same project size,
NPV and MIRR lead to the same decision
irrespective of the variations in the life of the
projects.
01/01/2010 372
Pay back period
01/01/2010 373
Pay back period
01/01/2010 374
Discounted Pay back period
01/01/2010 376
Accounting Rate of return
01/01/2010 377
Accounting Rate of return
01/01/2010 378
Accounting Rate of return
01/01/2010 379
Accounting Rate of return
• Demerits are:
• It considers accounting profit and not cash flow;
• Does not take into account the time value of
money;
• Accounting income is not defined since
depreciation method is not defined;
• The method is misleading since balance sheet
book values reflect neither the earning
capacities of the assets nor their market values.
01/01/2010 380
Assessment of various methods
01/01/2010 381
Assessment of various methods
01/01/2010 382
Social Cost Benefit Analysis (SCBA)
01/01/2010 383
SCBA
01/01/2010 384
SCBA
01/01/2010 386
SCBA
• Examples of externalities are:
• beneficial infrastructure facilities created by the
project like roads which also benefit the
surrounding areas
• or the bad effects of environmental pollution
created by the project.
• In the first case, the project does not derive any
extra benefit but the community around the
project benefits without any payment.
01/01/2010 387
SCBA
• In the second case, the community around the
project suffers the inconvenience but the project
does not pay for it. These are relevant for SCBA.
• Taxes and subsidies: From the Project point of
view, the taxes and subsidies are monetary costs
and gains but from the social point of view they
are simply transfer payments.
• Concern for Savings: A private firm does not
have differential valuation between consumption
and savings.
In the capital-scarce developing countries, a
higher valuation is placed on savings and a lower
valuation is put on consumption.
01/01/2010 388
SCBA
• Concern for redistribution: From the social point
of view, a rupee of benefit going to an
economically poor section is considered more
valuable than a rupee of benefit going to an
affluent section.
• Merit wants –like adult education programme or
a balanced nutrition programme for school going
children - are not relevant from private point of
view but are important from social point of view.
01/01/2010 389
SCBA
• UNIDO approach:
• UNIDO approach and the Little-Mirrlees (‗LM‘)
approach emerged for SCBA in the early 1970‘s.
• The UNIDO approach has been laid out in their
publications: ‗Guidelines for Project Evaluation‘
1972 and ‗Guide to Practical Project Appraisal‘
1978.
• The method of project appraisal involves five
stages, each one measuring the desirability of
the project from a different angle:
01/01/2010 390
SCBA
01/01/2010 392
SCBA
• Basic issues in shadow pricing:
• 1.Choice of the unit of account: UNIDO‘s
answer is : ―net present consumption in the
hands of people at the base level of
consumption in the private sector in terms of
constant price in domestic accounting rupees‖.
• 2. Concept of tradability: For tradable goods the
international price is a measure of its opportunity
cost and hence represents the real value in
terms of economic efficiency.
01/01/2010 393
SCBA
• 3. Sources of shadow prices: UNIDO approach
suggests three sources depending on the impact
of the project on the economy::
• (i) increase or decrease in the total
consumption in the economy: shadow pricing is
the consumer‘s willingness to pay;
• (ii) decrease or increase in the production in the
economy : --shadow pricing is the cost of
production,
01/01/2010 394
SCBA
• (iii) increase or decrease in imports or exports :
shadow pricing is the foreign exchange value.
• 4. Taxes: (i) If a project results in diversion of
non traded inputs which are in fixed supply from
other producers or addition to non traded
consumer goods : taxes should be included;
• (ii) When the project augments domestic
production by other producers, taxes should be
excluded and
01/01/2010 395
SCBA
• (iii) for fully traded goods, taxes should be
ignored.
• Shadow pricing of specific resources:
• Tradable inputs and outputs: A good is fully
traded when an increase in its consumption
results in corresponding increase in import or
decrease in export or when an increase in its
production results in a corresponding
increase in export or decrease in import.
01/01/2010 396
SCBA
• For fully traded goods, the shadow price is the
‗border price‘ which is the domestic currency
equivalent converted at the market exchange
rate.
• In practice, it is reasonable to regard tradable
inputs and outputs as fully traded.
• For non traded goods, the border price does
not reflect its economic value.
• It should be measured in terms of what
domestic consumers are willing to pay if the
output of the project adds to its domestic
supplies or if the requirement of the project
causes reduction of its consumption by others.
01/01/2010 397
SCBA
• The value of a non traded good should be
measured in terms of its marginal cost of
production if the requirement of the project
induces additional production or if the output
of the project causes reduction of production
by other units.
• Non tradable inputs and outputs:
• A good is non tradable when : its CIF import
price is greater than the domestic cost of
production, and its FOB export price is less
than the domestic cost of production.
01/01/2010 398
SCBA
• Externalities: an externality is a special class of
good:
• (i) which is not deliberately created by the
project sponsor but is an incidental outcome of
legitimate economic activity, (ii) which is
beyond the control of the persons who are
affected by it, for better or for worse,
• (iii) which is not traded in the market place.
01/01/2010 399
SCBA
• Some examples already referred to earlier are:
• roads built by factory being very useful for the
people around the factory or a factory emitting
emissions causing injury to the health of the
population around the factory etc.
• The valuation of external effects is very difficult.
Because they are intangible in nature but can be
estimated by indirect means:
01/01/2010 400
SCBA
• For example, the value of better transport
provided by the approach road built by a factory
may be estimated in terms of increased
activities and benefits derived there from.
• The cost of pollution may be estimated in terms
of the loss of earnings as a result of damage to
health caused by it and the cost of time spent for
coping with the unhygienic surroundings.
01/01/2010 401
SCBA
• Labour inputs: When a project hires labour,
there can be three possible effects on the rest
of the economy:
1.It may take labour away from other
employments – shadow price would be what
other users of labour are willing to pay for this
labour,
2.It may induce the production of new workers-the
social cost would be the amount of leisure that
the labour foregoes, the additional consumption
of food that the labour would now have as a
result of increased wages and the cost of
training that the worker has to undergo to
improve his skills etc. and
01/01/2010 402
SCBA
3. and it may involve import of workers –
shadow price would be the wage they
command.
• Capital inputs: When a capital investment is
made in a project,
--financial assets are converted into physical
assets
--and financial resources are withdrawn from
pool of savings and therefore alternative
projects are foregone.
• So the questions arise as to what is the value
of the physical assets and what is the
opportunity cost of the capital ?
01/01/2010 403
SCBA
• The shadow price of the physical assets is
calculated depending on whether it is
tradable or non tradable good.
• And the opportunity cost of capital is
measured by the consumption rate of interest
which is the price the saver must be paid to
sacrifice present consumption.
• Foreign Exchange: The UNIDO method
uses the domestic currency and so the
foreign exchange inputs of the project must
be identified and adjusted by an appropriate
premium to reflect the shadow price of foreign
exchange.
01/01/2010 404
SCBA
Measurement of the impact on distribution:
• For such assessments, the income gained or
lost by individual groups within the society must
be measured first.
• The gain or loss to an individual group within
the society as a result of the project is equal to
the difference between the shadow price and
market price of each input or output in the case
of physical resources
• or the difference between the price paid and
the value received in the case of financial
transactions.
01/01/2010 405
SCBA
Savings impact and its value:
• Here two questions are raised:
• Given the income distribution impact of the
project what would be its effects on savings?
• It is equal to Yi MPSi, where, Yi = change
in income of group i as a result of the project
and MPSi = marginal propensity to save of
group i.
• The second question is: What is the value of
such savings to the society?
• It is the present value lf the additional
consumption stream produced when that rupee
of savings is invested at the margin.
01/01/2010 406
SCBA
01/01/2010 407
SCBA
• This calls for suitably weighing the net gain or
loss by each group measured earlier, to reflect
the relative value of income for different groups
and summing them.
• UNIDO‘s guidelines suggested that the weights,
which essentially reflect political judgements
may be determined by an iterative process
involving interaction between the analyst and the
planners.
01/01/2010 408
SCBA
01/01/2010 409
SCBA
Little-Mirrlees (LM) approach:
• IMD Little and JA Mirrlees have developed an
approach to SCBA.
• There is considerable similarity between the
UNIDO approach and the LM approach.
• Both call for calculating the shadow prices,
consider the factor of equity and use of DCF
analysis.
01/01/2010 410
SCBA
• The differences are:
• While the UNIDO approach measures costs and
benefits in term of domestic rupees, the LM
approach measures costs and benefits in terms
of international prices (border prices).
• The UNIDO approach measures the costs and
benefits in terms of consumption whereas the
LM measures in terms of uncommitted social
income.
01/01/2010 411
SCBA
01/01/2010 413
SCBA
SCBA by Financial institutions: Financial
institutions analyse a project from the financial
profitability angle as well as from the angle of
SCBA.
• Essentially the three following aspects are
covered:
• Economic Rate of Return (ERR),
• Effective Rate of Protection (ERP)
• and Domestic Resource Cost (DRC).
01/01/2010 414
SCBA
Economic Rate of Return (ERR): This is the rate
of return the project will earn if there are no
distortions.
• The flows of costs and receipts are revalued at
their opportunity costs.
• The tradable inputs and outputs are valued at
their international prices and the non tradable
inputs and outputs are revalued at fixed
conversion factors.
• Labour is revalued at the shadow wage rate.
01/01/2010 415
SCBA
• The flow of net receipts is then discounted to
find the ERR. According the Planning
Commission, the ERR should be at least 12%
and should be more than the prevailing rate
of return.
Effective Rate of Protection (ERP): This
indicates the degree of effective protection
that a product enjoys through its production
cycle.
• The ERP measures the margin of protection
on value added in the production process
rather than on the product price.
01/01/2010 416
SCBA
• It is defined as the excess percentage of
domestic value added due to the imposition of
tariffs and other protective measures on the
product and its inputs over foreign or world
market value added.
• Tariffs and subsidies provide protection to
domestic processing activities by raising the
value added obtainable by a firm or industry.
01/01/2010 417
SCBA
01/01/2010 418
SCBA
Domestic Resource Cost: This is the most crucial
indicator of the viability of a project especially
from a macro-perspective.
• It is an indicator of the comparative advantage
in any product, as it refers to the real opportunity
cost in terms of domestic resources.
• It is useful in deciding whether a product should
be imported or domestically produced.
01/01/2010 419
SCBA
• For the purpose of calculations, the total cost of
the project is divided into two categories: rupee
and foreign exchange expenditure.
• The cost components included are: total
operating cost of the normal year, 8%
depreciation on fixed capital and a 10% return
on capital employed.
• Taxes are excluded as they are transfer
payments. Sales are revalued at world prices.
01/01/2010 420
SCBA
• The rupee expenditure and foreign exchange
saved/earned are calculated. The DRC is
compared with the exchange rate.
• A DRC lower than the exchange rate indicates
that the product could be profitably
manufactured locally.
Limitations of SCBA:
• Because of the nature of the social costs and
benefits there cannot be any standard method
or technique applicable to all types of
investments.
01/01/2010 421
SCBA
• Every project will require a different approach
while identifying and measuring its social
benefits and costs.
• Further many of the costs and benefits are
intangible and so their valuation in terms of
money is bound to be subjective due to the
biases and prejudices of the analyst.
• If all possible alternative assessments are
sought to be socially assessed, the costs would
be prohibitive.
• However the element of subjectivity can be
reduced by cross checks.
01/01/2010 422
SCBA
• In conclusion, in spite of the limitations, the
gains of the social evaluation of investments
cannot be disregarded.
• An awareness of the SCBA will enhance the
contribution of the entrepreneurs to the society
at large.
• Probably in due course of time, the social
scientists will improve the methods of
assessment used ion SCBA.
01/01/2010 423
8.Budget
• Budgetary control is a tool of management used
to plan, carryout and control the operations of
business.
• A budget is a plan of spending. It is a statement
showing how a firm would allocate its resources
during a given time period.
• In other words, it is a document that contains the
representation of the strategy of the firm in
monetary terms. It shows the resource
constraints on various activities of the firm.
01/01/2010 424
Budget
• The concepts and procedures under budget plan
and control have wide application not only in
profit oriented enterprises but in every enterprise
where the resources are limited and have to be
properly applied.
• Budget plan and control is closely related to
accounting. It also supplies info for marginal
and standard costing and flexible budgets.
• Budget plan and control gives a firm basis for
participative management.
01/01/2010 425
Budget
• It requires the involvement of all management levels
in the planning process and in the approaches for
accomplishing the goals.
• It enlightens the members of the management team
regarding the objectives of the enterprise and its
approaches. Thus it creates involvement and
commitment.
• The process of preparing the budget plan consists
of finalising the functional objectives and then
preparing the master budget.
• First step is to forecast future targets, resolve the
conflicts of sales- production-inventory problems,
determine resources and cash flows.
01/01/2010 426
Budget
01/01/2010 430
Types of Budgets
01/01/2010 433
Budget
01/01/2010 434
Budgetary Control System – a diagrammatic representation.:
Master Budget
Sales
Budget Cash Production
Budget Budget
Action by
Accounting variance Management at all
analysis reports and levels to remove
statements variance noted in
performance
01/01/2010 435
Budget
01/01/2010 436
Budget
01/01/2010 439
Budget
• In the top-down method, first the resources to be
allocated for the project as a whole is estimated.
• Such estimate is broken down into various
individual tasks for all the levels upto the lowest.
• In this method, the assumption is that the people
at the lower level tend to overstate the resources
as well as the time required to complete the
project.
• Here there is no atmosphere of trust. The process
may develop strains in the relationships with the
staff at lower levels.
• Moreover the senior level staff do not want to
share the power of decision making with the
juniors.
01/01/2010 440
Budget
01/01/2010 450
Budget
• Mismatch in the skills required and actually
assigned;
• Inadequate provisions for contingencies and cost
escalations; and
• Use of inappropriate techniques for estimates. .
• 10. Budgeting techniques: Two techniques which
were used earlier and not so popular are :
• Zero Based Budgeting (ZBB) (Every time funds are
to be released, the projects are reviewed
sometimes resulting in scrapping of the project
altogether – this demoralises the people working
on the project)
• and Planning, Programming, Budgeting system
01/01/2010 451
Budget
• Life Cycle Costing: Earlier, the approach of the
project sponsors or entrepreneurs was to take into
account all the expenditures needed to implement
the project and start commercial production and
look no further beyond that point.
• This is a grave mistake as can be explained with
the example of a cement plant.
• A sponsor may choose to put up a plant based on
the wet process since it is cheaper for
commissioning but the further maintenance costs
would be high.
• Whereas a plant based on the dry process would
cost high initially for commissioning but further
maintenance costs would be much lower.
01/01/2010 452
Budget
• Considering the life time of the project, it
would be sensible to opt for a plant with the
dry process.
• This is what Life cycle costing system about.
In this system, choices made are evaluated
against the total life cycle costs of the
system.
• This system takes into account the cost of R
& D, production costs, operating and
maintenance costs, construction costs and
phase out costs.
• Costs under these heads are calculated for
each of the short listed projects and then
01/01/2010
decision is taken based on the aggregates. 453
Budget
01/01/2010 454
Project Cash Flows
01/01/2010 463
Project Cash Flows
• Post tax principle:
• Cash flows should be measured in post-tax
terms. Since the income from the project is
marginal i.e. additional, the marginal tax rate
should be considered for estimating the tax
liability of the project.
• Treatment of losses:
• The general principle is:
• If the firm incurs losses (whether the project
alone makes profit or loss) : defer the tax
savings till the firm makes profits.
• If the project loses but the firm makes
profits: take tax savings in the year of loss; 464
01/01/2010
Project Cash Flows
• If both the firm and the project make profits:
consider taxes in the year of profit
and
• In the case of a standalone project: defer tax
saving until the project makes profits.
• Effect of non-cash charges: In India as per
the IT act, the admissible method of
depreciation for corporate taxation purposes
is the written down method. (Buildings5%,
Plant and machinery15%, Computers60%,
Vehicles on hire 40% Pollution control
equipment 100%)
01/01/2010 465
Project Cash Flows
• Consistency principle:
• Cash flows and the discount rates applied to
these cash flows should be consistent with
respect to the investor group and inflation.
• Cash flows to all the investors : (equity holders
+ lenders)
• = PBIT(1-tax rate) + non cash charges –Capital
expenditure –change in the working capital
• If you consider the cash flows from the point
of view of the equity investors alone then it
changes to :
• The figure in the previous step – preference
dividend-repayment of debt +proceeds from
debt
01/01/2010
issues-redemption of preference capital
466
+proceeds from preference issues.
Project Cash Flows
• The discount rate applied for cash flow to all
investors is the weighted average cost of
capital and for cash flow to equity is the cost
of equity.
• Generally, the cash flow to all investors is
considered and hence the weighted average
cost of capital is applied.
• Inflation: When the cash flows are in nominal
terms, the discount rate is also nominal and
if it is real cash flow then real discount rate.
• However, generally nominal cash flows are
used and hence nominal discount rates
should be used.
01/01/2010 467
Project Cash Flows
• Cash Flow Illustrations: See PC Pages 9.10
onwards.
• Viewing a project from different perspectives:
• A project can be viewed from four distinct
points of view and they are:
• Equity point of view;
• Long term funds point of view; (Long term
funds = equity + Long term debt)
• Explicit cost funds point of view: (Explicit cost
funds = Long term funds + short term debt)
and
• Total funds point of view. (Total funds = Long
term funds + current Liabilities)
•01/01/2010
The cash flow components slightly differ from468
one another.
In capital budgeting, the most common view is that of explicit cost
funds.
Examples involving this view: see exhibits 9.2 and 9.3 in PC.
Net cash flows relating to explicit cost funds:
Year 0 Year1…
1.Fixed Assets
2.Net working Capital
3.Revenues
4.Costs (other than dep. and interest)
5.Depreciation
6.Profit before tax:
7.Tax
8.Profit after Tax
9.Net salvage value of fixed assets
10.Recovery of nwc.
11.Initial outlay (1 + 2)
12.Operating cash inflow ( 8 + 5)
13.Terminal cash inflow (9 + 10)
01/01/2010 470
Cash flows relating to equity:-Contributions made and benefits
receivable by equity holders.: (See example in exhibit 9.6 in PC)
Year 0 Year1…
1.Equity funds
2.Revenues
3.Operating Costs (other than dep. and
interest)
4.Depreciation
5. Interest on WC advance
6.Interest on term loan
7..Profit before tax:
8.Tax
9.Profit after Tax
10.Preference dividend
11Net salvage value of fixed assets
12Net salvage value of current assets
13Repayment of term loans
14Redemption of preference capital
01/01/2010 472
Year 0 Year1…
1.Fixed assets
2.Working capital margin
3.Revenues
4. Operating costs
5.Depreciation
6. Interest on WC advance
7.Interest on term loan
8.Profit before tax:
9.Tax
10.Profit after Tax
11Net salvage value of fixed assets
12Net recovery of WC margin
13Initial investment (=1+2)
14Operating cash inflow = (10+5) +7(1-t)
01/01/2010 474
Yea Year1
r0 …
1.Total funds
2.Revenues
3. Operating costs
4.Depreciation
5. Interest on WC advance
6.Interest on term loan
7.Profit before tax:
8.Tax
9.Profit after Tax
10.Net salvage value of fixed assets
11.Net salvage value of current assets
12.Initial investment (=1)
13. Operating cash inflow = (9+4) +6(1-t) + 5 (1-t)
01/01/2010 479
Project Cash Flows
• Cash inflow: = Operating Inflow (i.e. PAT +
Dep.
+ int. on lease rental )
+ Terminal Inflow ( i.e.
Recovery of
wc at book value + residual
value
of capital assets
i.e. land at 100% and
other capital assets at 5% on
initial cost).
01/01/2010 480
Project Cash Flows
• For IRR purposes, the max. life of the project
would be 12 years in general and may be
shorter depending upon the rate of
technological obsolescence.
• There are some minor differences between
the way the financial institutions define and
we have defined the cash flows from the total
funds point of view.
01/01/2010 481
Cash flow stream Cash flow defined from
defined by the financial the total funds point of
institutions view
Initial investment Capital expenditure on Same as in Financial
the project (net of institutions
interest during
construction period) +
outlay on working
capital
Operating cash flow PAT + Dep. PAT + Dep.
+ INTEREST.. + INTEREST (1-T)
Terminal Cash Inflow Recovery of WC at book Recovery of WC at book
value +Residual value of value +EXPECTED NET
capital assets (LAND AT SALVAGE VALUE OF
100% AND CAPITAL OTHER ASSETS
ASSETS AT 5% OF
INITIAL COST)
01/01/2010 482
Project Cash Flows
• Planning Commission:
• The “Manual for preparation of feasibility
reports” developed by the Planning
Commission has prescribed certain rules in
this regard.
• Interest during construction period should
not be allowed for in the year wise capital
expenditure figures since it is implicitly taken
into account by the discounting procedure.
(Any replacement expenditure incurred
during the life of the project should be
allowed in the year of occurrence)
01/01/2010 483
Project Cash Flows
01/01/2010 484
Project Cash Flows
• Capital cost estimates generally do not allow
for funds required for wc purposes, which
are assumed to be borrowed, but only for the
margin on wc.
• In this case, the operating cost estimates
must include interest payments on funds
borrowed for working capital.
• In some cases involving the use of fixed
interest term loans for capital expenditure,
an IRR on own funds may need to be
presented.
01/01/2010 485
Project Cash Flows
• In such cases, the initial capital cost figures
should cover only the expenditures out of
equity capital.
• Repayment of term loans and interest due
on them should be allowed for in the
subsequent years as and when they are
expected to arise.
• Costs and returns should be calculated over
the entire life of the project or over 25 years
whichever is less.
• The returns should allow for a salvage value
of assets at the end of the period.
01/01/2010 486
Project Cash Flows
01/01/2010 489
Project Cash Flows
• Tempering the optimism:
• Too much of optimism is bad. Management
should look at the results of similar outside
projects to arrive at reasonably optimistic
targets.
• For taking an „outside view‟ Daniel Kaheman
and Amos Tversky suggest the five step
procedure: Select a reference class, Assess
the distribution of outcomes, Intuitively
predict your project‟s position in the
distribution, Assess the reliability of your
prediction and Correct the intuitive estimate.
01/01/2010 490
Project Cash Flows
• Putting optimism in place: Daniel…. says
that there needs to be a balance between
optimism and realism – between goals and
forecasts. Aggressive goals may motivate
the people but outside view forecasts should
be used to decide whether or not to make a
commitment in the first place.
• Understatement of profitability:
• The opposite kind of bias can occur while
forecasting the terminal cash flows and may
understate the profitability and due to this
some of the projects which can otherwise be
accepted may be rejected.
01/01/2010 491
Project Cash Flows
• For example, defining the salvage value of
the assets at 5% of the initial cost: This may
happen due to :
• underestimating the salvage value (actual
wear and tear is much less than the
depreciation provided) ;
• ignoring intangible benefits; (the project may
establish a market position, create an R & D
capability , enhance distribution network,
and build brand loyalty);
• and Value of future options is overlooked
(new investment opportunities are opened
up through this project).
01/01/2010 492
9.Materials Management in Project
Planning-Procurement, storage and
disposal
• Different varieties of quality materials have to
be procured in adequate quantities at the
right price, stored safely in a proper place ,
used judiciously during the execution of the
project and the waste if any have to be
disposed efficiently.
• Here are some „right‟ parameters about the
material required for the project:
right price; right quality and right
technology;………
01/01/2010 493
Procurement Planning
• ……..right engineering parameters; right
lead time; right quantity; right source;
right packaging; right transportation;
right handling methods; right insurance;
right legal contracts; right place of
delivery; right ethical standards;
• According the PMBOK: “Project procurement
Management is a process of acquiring
goods and services from a firm external to
the performing organisation.”
01/01/2010 494
Procurement Planning
01/01/2010 495
Procurement Planning
• It involves the questions: What to procure
and then how and when?
• Centralised procurement process has its
advantages of cost savings.
• The organisation may have policies to
procure all materials from a single or
multiple suppliers.
• Before this process begins, some
documents relating to the project would
exist and they can be taken as guide:
• They are Scope statement,. Product or
service description/ PBS, procurement
sources, market conditions, make or buy
analysis.
01/01/2010 496
Procurement Planning
01/01/2010 497
Procurement Planning
01/01/2010 498
Procurement Planning
01/01/2010 499
Procurement Planning
01/01/2010 500
Procurement Planning
01/01/2010 502
Reasons for Making: Reasons for buying:
1. Lower Production Costs; 1. Inadequate capacity in own
manufacturing;
2. Unreliable suppliers;
2. Reduction of inventory
3. Assurance of supply of
costs (JIT);
adequate quantity;
3. Ensuring alternate sources
4. Utilisation of surplus
of supply;
labour capacity;
and
5. Quality Control
4. Easy availability of
and
standardised materials
1. Protection of special
design or quality
(Copyrights/Patents)
Procurement….
Expert judgement: Analysis of the
procurement process can be done by the
specialists if available in the firm, or by the
consulting firms or by the professional,
technical associations conversant with the
products.
Selection of vendors
01/01/2010 506
Selection of vendors
01/01/2010 507
Selection of vendors
01/01/2010 508
Selection of vendors
01/01/2010 509
Selection of vendors
01/01/2010 510
Selection of vendors
01/01/2010 511
Selection of vendors
01/01/2010 512
Selection of vendors
01/01/2010 514
Selection of vendors
01/01/2010 515
Selection of vendors
• A typical RFP cover many topics such as: A
brief overview of the project, product
specifications, mode of supply of
products/services, mode and time of
payment, insurance of the product/services,
names of the key people with authority and
responsibility to take decisions etc.
• The format should be designed in such a way
that it elicits in-depth, accurate and complete
information from the vendor.
01/01/2010 516
Selection of vendors
• Criteria for judging the vendor: Some of the
factors are:
Total cost of procurement; vendor‟s
capacity to deliver at lowest cost;
technical expertise, management style,
and financial position.
• Solicitation: The next stage is solicitation.
It is the process of obtaining quotations,
bids, offers or proposals from all the
prospective vendors. This involves:
01/01/2010 517
Selection of vendors
short-listing the vendors : The list should
contain all the info about their expertise in
different functional areas.
If not readily available from sources like
associations, then meeting with customers
of the vendors, visiting their sites, enquiring
from their bankers etc.
meetings with the vendors: These meeting
precede the proposals from the vendors and
are used to eliminate all the communication
gaps regarding the needs of the project and
prepare the ground for further negotiations.
01/01/2010 518
Selection of vendors
01/01/2010 519
Selection of vendors
Advertising: This is a tool used by the project
organisation to invite proposals from
vendors through sealed bids.
There is no negotiation of price and the lowest
bid is usually accepted.
Advantage of advertising is that a data base of
potential vendors can be created from the
responses received for the advertisement.
For the projects involving the government,
advertising in mass media is mandatory.
01/01/2010 520
Selection of vendors
01/01/2010 521
Selection of vendors
• Contract negotiation:
• Is a process aimed at enhancing the
clarity and ensuring mutual consensus on
the structural and procurement aspects
mentioned in the contract, before signing
it.
• The topics to be covered in the contract
are: price of procurement, technical
approach, management style, terms and
conditions, legal bindings etc.
• The contract may be in the form of a MOU
in the case of highly complex and
technical products.
01/01/2010 522
Selection of vendors
01/01/2010 524
Contracting….
01/01/2010 525
Contracting….
01/01/2010 530
Contract administration
01/01/2010 531
Contract administration
01/01/2010 532
Contract administration
01/01/2010 533
Contract administration
01/01/2010 539
Contract administration
01/01/2010 540
Contract administration
01/01/2010 542
Project Stores Management
• Among all the areas of Project management,
the warehousing of the project material
appears to be the most neglected, even though
a major chunk of the project investment is in
the material.
• In India, it is a common sight to see the project
machinery being stored in open grounds
gathering dust and rust till they are properly
erected.
• The responsibility of the stores manager is an
efficient, smooth running, economic operation
of the stores to give good timely service to the
project.
01/01/2010 543
Project Stores Management
• Obviously the stores manager requires
adequate space to store the materials and a
group of competent staff to handle them.
• The ill-effects of bad stores management:
Materials like cement or paint would harden;
• Iron and steel items would corrode;
• electronic instruments would be spoiled due to
humidity, heat and dust;
• fluids like petrol evaporate;
• materials containing wood get damaged by
white ants;
01/01/2010 544
Project Stores Management
• storage batteries getting damaged due to
humidity;
• Glass sheets stacked one over another
exposed to the sun crack;
• fire bricks disintegrate due to water;
• materials containing cloth and paper being
eaten away by rats and cockroaches
• and the list can go longer.
01/01/2010 545
Project Stores Management
• Thus the stores manager has to guard the
project materials from light, sun‟s rays, air,
heat, moisture, water, oils, dust, dirt, rats,
moths, white ants, fire, explosions, theft and
pilferages.
01/01/2010 546
Financing of the project
• A project may entail investment in :
land, plant and machinery, other fixed
assets, technical know-how,
royalty, advertisements,
distribution network and working capital.
• So, just like any corporate needs finance for
its various activities and plans the
appropriate structure of finance from various
sources, the project manager has also to do
the same exercise.
01/01/2010 547
Financing of the project
• So the questions that arise are:
What is the total cost of the project?
What should be capital structure? Which financing
instruments?
Whether the sources should be internal or external?
If external, whether it should be private or public
sources?
What should be the ideal cost of capital?
How much should be from short term and how much
from long term? etc.
01/01/2010 548
Financing of the project
• Preliminary and capital issue expenses;
• Pre-operative expenses;
• Margin money for working capital and
• Initial cash losses.
• The Means of Finance are as follows:
– Share Capital/reserves;
– Preference Capital;
– Private Equities/Venture Capital;
– Term Loans;
01/01/2010 549
Financing of the project
• Cost of the project comprises of the outlay
on account of:
• Land and site development;
• Buildings and Civil works;
• Plant and machinery;
• Technical know-how and engineering
fees;
• Expenses on foreign technicians and
training of Indian technicians abroad;
• Miscellaneous fixed assets;
01/01/2010 550
Sources of Finance
– Debentures;
– Deferred credits (from suppliers of plant
and machinery);
– Incentives and
– Other Miscellaneous sources (Unsecured
loans, public deposits, leasing and hire
purchase finance).
01/01/2010 551
Sources of Finance
• Planning the means of finance: The norms
prescribed by the regulatory bodies and the
financial institutions and the key business
considerations of the project sponsor have
to be kept in mind while planning the
structure of the means of finance.
• The norms of the regulatory bodies have the
interest of the investors as one of the
objectives.
• The norms of the financial institutions have
the safe return of their funds with interest as
their objective.
01/01/2010 552
Sources of Finance
• The project sponsor will have the following
factors in mind:
– cost of funds –cost of debt is cheaper due
to tax rebates on interest paid, whereas
dividend tax has to be paid on the
dividends paid out;
– Risk: Business risk arises from the
variability of earnings and the financial
risk arises from financial leverage i.e.
amount of debt;
– Control: the sponsors would like to have a
programme of financing which enables to
retain their control over the firm;
01/01/2010 553
Sources of Finance
– Flexibility: the structure of finance should
be such that the firm is able to borrow or
raise further capital in future if necessary.
• While discussing the capital structure it is
worthwhile to study the pluses and minuses
of equity and debt by comparing them:
01/01/2010 554
Equity Debt
Equity shareholders have a Creditors have a fixed
residual claim on the claim in the form of
income and wealth of the interest and principal
firm. payment.
Dividends paid is not tax Interest paid by the firm is
deductible tax deductible
Equity has an indefinite life Debt has a fixed maturity
01/01/2010 556
Sources of Finance
01/01/2010 562
Sources of Finance
01/01/2010 563
Sources of Finance
01/01/2010 564
Sources of Finance
01/01/2010 565
The advantages and disadvantages of the
equity capital are:
Advantages Disadvantages
No legal consequences Sale of equity dilutes
of skipping dividends. So the control of the
the co. need not pay existing
dividends if there are no shareholders
sufficient earnings or
when the profit is
required to be ploughed
back due to good
investment opportunities
01/01/2010 566
No maturity date and Rate of return required by
hence the co. need not the equity investors is
redeem them generally very much
higher than the
requirement of the other
investors
The larger the equity, Dividends are paid out of
the larger is the PAT, whereas interest
capacity of the firm to payments are tax
raise debt finance deductible
Equity dividends are Cost of issuing equity is
exempt from income high due to underwriting
tax at the hands of the commission, brokerage
equity shareholders
01/01/2010 costs 567
Sources of Finance
• Preference capital: - a hybrid instrument
having some characteristics of equity and
some of the debentures.
• Preference dividends are payable only out of
distributable profits but paid before the
equity shareholders are paid.
• The Preference dividend is not a tax
deductible payment for the company.
• Usually the preference dividend amount is
fixed and much lower than the rate of
dividend paid to the equity holders.
01/01/2010 568
Sources of Finance
• Preference equity holders do not have the right to
vote and their residual claim ranks above the equity
shareholders.
• There are different types of preference shares:
● Cumulative and non-cumulative preference
shares, ● participating and non-participating
preference shares, ● redeemable and non-
redeemable preference shares, and ● convertible
and non-convertible preference shares. (In India,
issue of Non-redeemable preference shares is not
permitted).
01/01/2010 569
Advantages and disadvantages of
preference capital:
Advantages Disadvantages
No legal Since dividends paid to
obligation to pay preference share holders is
dividends. not tax exempt, it is costlier
than debt
No redemption Preference share holders‟
liability in the claim to the assets of the co.
case of non- are prior to the claims of the
redeemable equity share holders.
preference
shares
01/01/2010 570
Advantages and disadvantages of
preference capital……..
01/01/2010 571
Sources of Finance
• Debentures: Debenture is an alternative to
term loan. The Co. promises the debenture
holder to pay interest periodically at the
indicated rate and redeem the debenture on
the maturity date.
• The features of debentures are:
– A Trustee, usually a bank or a financial
institution or an insurance company is
appointed to take care of the interests of
the debenture holders to see that the co.
fulfils its contractual obligations.
01/01/2010 572
Sources of Finance
– Secured debentures are secured by
mortgages or charge on the immovable
properties and a floating charge on the other
assets. Debentures may also be unsecured.
– These are medium term (1 to 5 years) or
long term (more than 5 years) instruments
– Debentures for periods 18 months or above
have to be compulsorily rated
– For debentures of over 18 months DRR has
to be created and built up to at least 50%
before the redemption date.
01/01/2010 573
Sources of Finance
– They may carry fixed or floating rate of
interest (linked to a benchmark such as
the treasury bill) (or zero interest in the
case of deep discount bonds)
– They may have in-built features of „call‟
and „put‟ options in favour of the issuers.
– The interest paid on the debentures is a
tax deductible expense for the co.
– Debentures may be issued with the feature
of partial or full conversion facility at the
end of a certain predetermined period.
01/01/2010 574
Sources of Finance
– (Part or full amount of the Debentures are
converted into shares at the
predetermined premium)
– Convertible debentures are generally
popular since the interest payable on
them is lower than non-convertible
debentures and also lower than the bank
interest the co. would have paid for a bank
loan, and enables the co. to convert the
debenture amount into shares at premium.
01/01/2010 575
Sources of Finance
Secured Premium Notes (SPNs): This is a
new instrument introduced by TISCO in 1992.
• This is akin to a debenture with the interest
payments staggered and paid along with part
of the principal, in four instalments at the
end of the 4th to 7th years. (FV Rs. 300.
Repayments at the end of 4th year to 7th year
: Rs. 75 towards principal + Rs. 75 towards
interest and a warrant of entitlement of one
share at Rs. 80 at the end of the 7th year.)
01/01/2010 576
Sources of Finance
• Indexed bonds: ICICI issued such bonds in
1997, each for Rs. 6000:
• It contained two parts – one was a deep
discount bond with redemption value of Rs.
22000/- at the end of 12 years.
• The second part was a small amount of Rs.
2000 the amount of repayment being
calculated as 2000*BSE sensex2000/BSE
Sensex1997.
01/01/2010 577
The advantages and disadvantages of
debt financing are:
Advantages Disadvantages
Interest paid on debt is Failure to make the
tax deductible expense timely interest and
whereas dividends paid principal repayments
on equity or preference may cause bankruptcy
shares are paid out of of the firm
PAT
Does not result in Increases financial
dilution of control leverage and hence
according to CAPM
increases the cost of
01/01/2010 578
equity
The advantages and disadvantages of debt
financing are……:
01/01/2010 582
Sources of Finance
• Generally preferential allotment is made to
promoters, strategic investors, VCs, FIs and
suppliers.
• The rationale for preferential allotment is to
secure the equity participation of those the
company considers desirable, but who may
otherwise find it very costly or impractical to
buy large chunks of shares in the market.
01/01/2010 583
Comparison of the various
methods of offering with each other:
Public Rights Pvt. Preferential
Issue Issue Placem allotment
ent
Amt. that can be Large Modera Modera Moderate
raised te te
Cost of issue High Negligi Negligi Negligible
ble ble
Dilution of control Yes No Yes Depends
01/01/2010 585
Sources of Finance
01/01/2010 586
Sources of Finance
• Usually, the term lending FIs which finance
the acquisition of fixed assets and the banks
which finance the working capital
requirements are in constant touch with
each other and coordinate the lending
activities, while monitoring the accounts of
the borrower.
• The FIs have the „first charge‟ over the
assets which they have financed and have
the „second charge‟ over the assets financed
by the banks.
01/01/2010 587
Sources of Finance
01/01/2010 588
Sources of Finance
01/01/2010 589
Sources of Finance
• Thereafter the repayments of the principal
and interest due would begin at monthly,
quarterly or half yearly intervals depending
on the cash flows projected.
• Since the lending institutions will charge
penal interest on the „overdue‟ amounts (i.e.
the amounts of principal and or interest not
paid on due dates), the project manager has
to correctly calculate the cash outflows on
account of these dues.
01/01/2010 590
Sources of Finance
Usually the loan documents stipulate certain
covenants such as:
the board should have a nominee from the
lenders,
additional funds should be brought in by the
promoters in case of overrun;
bar to undertake any new project until the dues
are paid in full;
restrictions on transfer of shares of promoters
to others,
payment of dividends with the permission of
lenders etc.
01/01/2010 591
Sources of Finance
Procedure of sanction of term loan by the
FIs/banks:
Application by the co. in the lending
institution‟s standard form along with the
necessary enclosures like the Project Report,
Projected financial statements etc;
Initial processing by FI to check whether the
application is complete;
appraisal of the project;
01/01/2010 592
Sources of Finance
Procedure of sanction of term loan by the
FIs/banks:
Application by the co. in the lending
institution‟s standard form along with the
necessary enclosures like the Project Report,
Projected financial statements etc;
Initial processing by FI to check whether the
application is complete;
appraisal of the project;
Sanction of the proposal by the appropriate
authority and issue of the Sanction letter to
the co. along with the detailed list of terms
and conditions/covenants;
01/01/2010 593
Sources of Finance
creation of charges in favour of the lenders;
disbursement of the loans in stages as agreed
between the lenders and the co. depending
upon the projected cash flows;
and monitoring of the progress of the project
and recovery of the interest and principal.
• Depending on the size of the loan, more than
one bank/institution may participate in the
lending with a view to share the risk.
In such a case, the co. appoints one bank as
the „lead bank‟ , and prepares an „Information
Memorandum‟.
01/01/2010 594
Sources of Finance
The lead bank enlists the services of some other
banks in sharing the lending based on the
Information Memorandum.
This process is known as „Syndication‟
• Working Capital Advances: Used for financing
the current assets.
• In the pre-production stage, finance is given in
the form of Cash Credit/Overdraft/Letter of
Credit.
• Under the Cash Credit/Overdraft system, the
bank fixes the maximum amount that the co.
can draw for its operations, called the „limit‟.
01/01/2010 595
Sources of Finance
• Interest is charged periodically on the actual
amount utilised by the co.
• The operations are reviewed at the end of
every year and then renewed for another
year.
• In the case of loans, the limit amount
assessed for working capital needs of the
co. is given in the form of a loan and interest
is charged on the entire loan amount till it is
repaid.
01/01/2010 596
Sources of Finance
• In some cases, the supplier of RM may
demand an LC in which case the bank gives
the LC facility also to the co. as part of the
WC limits.
• LC is opened in favour of the supplier of the
RM, and on receipt of the stipulated
documents form the supplier, the bank pays
the supplier.
• The amount is then recovered by the bank
from the co.
01/01/2010 597
Sources of Finance
• In the post production stage, the co. sells its
products, raises bills on its customers, some
of whom avail some credit periods for
repayment.
• The bank discounts such bills on the co.‟s
debtors and credits the amount to the Cash
Credit/Overdraft account. Thus the cycle
goes on.
• There are other miscellaneous sources of
finance and they are:
01/01/2010 598
Sources of Finance
• Deferred credit: Suppliers of capital goods
usually offer long term credits.
• If the rate of interest loaded in the price is
less than the bank‟s rate, it would be
advantageous for the co. to avail the deferred
credit.
• However the supplier extending such
deferred credit is subject to a bank
guarantee, which would be part of the credit
facilities extended by the bank to the co.;
01/01/2010 599
Sources of Finance
• Lease and Hire Purchase finance; A Lease
finance represents a contractual
arrangement whereby the lessor grants the
lessee the right to use an asset in return for
periodic lease rental payments.
• Leasing of industrial equipments is a form of
debt finance. Two types of leases: Financial
and Operating leases:
01/01/2010 600
The differences between Leasing and
Hire Purchase is tabulated below:
Leasing Hire Purchasing
Lessee cannot claim Hirer is entitled to claim
depreciation depreciation
The entire lease rental Only the interest
is a tax-deductible component of the hire
expense for the lessee purchase instalment is a
tax-deductible expense
01/01/2010 602
Sources of Finance
• Some well known companies prefer to collect
deposits from the public for periods depending
on their cash in flow, since the covenants that
apply to loans from FIs do not apply.
• However new companies may not be able to
raise such deposits since their track record is yet
to be built to attract the attention and confidence
of the public.
01/01/2010 603
Sources of Finance
• Special schemes of institutions: Sellers of
Capital equipments offer long term credits to
their buyers by obtaining their accepted Bills of
exchanges, discount them with their bankers
who in turn rediscount them with IDBI to
refinance themselves.
• ICICI operates a ―Suppliers‘ Credit‖ Scheme,
where the bank discounts the long term Bills of
exchanges of the sellers after they are accepted
by the buyers and co-accepted (‗avalised‘) by
their bankers.
01/01/2010 604
Sources of Finance
• Subsidies and sales tax deferments and
exemptions: Some states offer subsidies to
projects located in their states by giving them a
sizeable amount of the project cost say even
upto 25% subject to a certain maximum
amount.
• In addition some states offer sales tax
exemptions (on materials purchased from the
state) and deferments for a few years.
• The deferments are equivalent to interest free
loans.
01/01/2010 605
Sources of Finance
• Short term loans from financial institutions :
Companies with good financial track records are
offered short term – one year—loans without any
securities for tiding over their financial difficulties.
These are called ‗Corporate loans‘.
• Commercial papers: Companies with good credit
rating may issue CPs which are unsecured
promissory notes for periods not more than six
months.
• These are sold at discounts to the face values and
redeemed at their face values, the discount
representing the interest on the CPs. (See RBI‘s
website for the latest guidelines
:http://www.rbi.org.in/scripts/BS_ViewMasterCircular
s.aspx?Id=4285&Mode=0)
01/01/2010 606
Sources of Finance
01/01/2010 608
Sources of Finance
01/01/2010 609
Sources of Finance
• The Venture Capitalists (VCs) study the
entrepreneur‘s and his business‘s potential to
satisfy themselves that the entrepreneur‘s
management team is capable, talented,
experienced, committed and determined and
then invest in the co.
• After a few years, the VCs exit the co. by
divesting through ‗Offers‘ to retail investors at
premium or to other entrepreneurs with a good
margin of profit.
01/01/2010 610
Sources of Finance
• Raising Capital in the international markets: Due
to the globalisation of the Capital markets, an
Indian entrepreneur can now approach off-shore
markets, or markets in other countries for raising
capital (ADRs, GDRs) or borrowing (syndicated
loans) or issue bonds (FRNs, RUFs) in any
currency.
• The RBI has issued detailed guidelines about the
External Commercial Borrowings (ECBs) --about
the eligibility of the borrowers, limits of borrowing,
maximum rate of interest outflow etc., .Look up for
the same in their website:
http://www.rbi.org.in/scripts/BS_ViewMasterCircul
ars.aspx .
01/01/2010 611
Sources of Finance
• Evaluation of overseas debts: Overseas debt,
especially the Eurocurrency loans offers the
following advantages:
– Participating institutions have a very
professional approach and have huge funds
at their disposal to give loans of any
amounts;
– A lot of flexibility is availability in structuring
the loans;
– Tenors of the loans may go even up to 10
years;
01/01/2010 612
Sources of Finance
• The disadvantages are :
--ECBs are not economical for small projects due
to costs involved for appraisal and syndication;
– Interest rates charged depends on the risk
perception of the lender/lead lender;
– May be difficult to negotiate with the investors.
01/01/2010 613
Sources of Finance
• Global Deposit Receipts (GDRs) : These are
indirect equity investments issued in $s in the
Euromarkets.
• The shares issued by the co. are held by a
depository, usually a large international bank
which receives all the benefits of the underlying
shares and distributes to the holders of the DRs.
• Each DR represents a certain number of shares.
These GDRs are listed and traded in major
stock exchanges in Europe.
01/01/2010 614
Sources of Finance
• The issuer pays dividends in the home
currency to the Depository which is converted
into $s and paid by the Depository to the
holders.
• The holders of the GDRs can convert the DRs
into shares at any time by surrendering them to
the Depository.
• Since GDRs are FDIs, appropriate permission
has to be obtained from the FIPB and RBI.
• American Depository Receipts (ADRs): ADRs
are similar to the GDRs except for the fact that
they are listed in the Stock Exchanges in the
USA and attract more stringent disclosure
conditions imposed by the SEC.
01/01/2010 615
Sources of Finance
• Foreign Domestic markets: Another way to raise
money internationally is to sell securities
directly in the domestic capital markets of foreign
countries.
• Example would be an Indian co. issuing
securities in $s in the capital markets of USA.
• (Indian cos. have already tapped the US,UK,
Japan and Switzerland markets.)
• The foreign issuer has to satisfy all regulations
applicable to the domestic firms. There may be
in fact additional obligations to be fulfilled by the
foreign issuers.
01/01/2010 616
Sources of Finance
• The US Capital Market is the largest with a very active
derivatives market also.
• Under Rule No. 144A under the Securities Act of 1933,
Yankee bonds can be issued to QIBs without much
restrictions which are applicable to the securities issued
to the general public.
• (Yankee bonds are bonds issued in $s in USA by issuers
of other countries.
• Similarly Bull Dogs, Samurais and Matilda or Kangaroos
are bonds issued in Stg. Pds., Japanese Yen and
Australian $s in the respective countries by issuers of
other countries.)
01/01/2010 617
Sources of Finance
• Export Credit Schemes: The Governments of a
number of countries like US, Japan and India
have created ‗EXIM‘ banks for financing exports
of capital goods and related technical services.
• Under the ‗Berne Union‘ conventions, the EXIM
banks‘ interest rates applicable for export credits
to Indian companies are regulated.
• Both Buyers‘ credits as well as Suppliers‘ credits
are provided.
01/01/2010 618
Sources of Finance
• Buyers‘ Credits: Under this Scheme, credit is
provided directly to the Indian buyer of capital
goods/technical services from the overseas
exporter.
• The steps involved in this process are:
• The overseas exporter and the Indian buyer
negotiate the contract;
• Application for the Buyer‘s credit is submitted to
the Export Credit Agency of the exporter‘s
country; processed by the agency and is
approved;
01/01/2010 619
Sources of Finance
• The loan agreement containing the terms and
conditions of the buyer‘s credit is negotiated
between the exporter‘s bank and the Indian
borrower (and the guarantor if any of the Indian
borrower) and entered into.
• Suppliers‘ Credit: This is a credit provided to the
overseas exporters so that they can make
available medium term finance to Indian
importers.
01/01/2010 620
Sources of Finance
• The steps involved in the process are:
• The overseas exporter notifies his bank and the
export credit agency of a potential export order
from an Indian buyer, requiring medium term
finance;
• The export credit agency communicates its
willingness to provide the facility;
• The terms of the facility are incorporated in the
contract between the overseas exporter and the
Indian buyer.
01/01/2010 621
Sources of Finance
• The salient features of the finance provided by
the export credit agencies are:
• The finance is tied to import of goods and
services;
• Up to 85% of the value of imports is available as
finance;
• Finance available for long tenors at reasonable
cost;
• Finance is provided against the guarantees of
the buyer‘s bank (in the case of buyer‘s credit)
and the seller‘s bank (in the case of seller‘s
credit).
01/01/2010 622
Sources of Finance
• Project financing structures: Full recourse
structure and Limited recourse structure:
• Full recourse structure: The features are:
• If the project is implemented by a new company,
the borrowings of the co. are backed by charge
on all the existing and future assets of the co.
• If an existing co. borrows for a new project, then
the new lender gets a ‗pari-passu‘ charge over
all the existing and future assets of the co. along
with the other lenders.
01/01/2010 623
Sources of Finance
• The viability of the project would be assessed on
a stand-alone basis but the stand alone cash
flows as well as the total cash flows of the
company are taken into account to judge
whether the company would be in a position to
service the existing as well as the proposed
debts.
• In addition to the above charges, the lenders
sometimes insist on the personal guarantee of
the promoters also and a corporate guarantee of
one of the group companies.
01/01/2010 624
Sources of Finance
• Limited recourse structure: Of late private
participation in infrastructure projects is
increasing. The salient features of the structure
are:
• The project is set up as a separate company as
an SPV;
• The pvt. sector promoter usually takes a major
stake in the equity of the project and enjoys the
over-all responsibility for running the project;
01/01/2010 625
Sources of Finance
• The pvt. sector promoter provides stand-by
support for cost overruns if the quantum of such
support is crystallised before the financial
closure;
• The cash flow of the SPV is handled by a Trust
or in an escrow account for appropriating the
cash flows in the predetermined manner for
various requirements of the project as well as
debt servicing. After all the requirements are
met, the residual cash flow is available to the
project company.
01/01/2010 626
Sources of Finance
• In some cases, the government guarantee may
be available;
• Lenders do not have recourse to the sponsors
and their other assets.
• Financial closure: Financial closure means that
all the sources of funds for the project have been
tied up.
• Generally in the case of infrastructure projects,
financial closure takes more time since the
lenders have to satisfy themselves about all the
issues concerned before committing their funds.
01/01/2010 627
Sources of Finance
• In general, financial closure can be achieved
early if:
• Suitable credit enhancements (additional
securities) are done to the satisfaction of the
lenders;
• Underwriting arrangements are made for market
related securities offerings;
• The credit worthiness and reputation of the
sponsors is well established and
• The proposal is simultaneously processed by all
the proposed lenders and coordinated among
themselves.
01/01/2010 628
Cost of Capital
01/01/2010 629
Cost of Capital
01/01/2010 630
Cost of Capital
01/01/2010 631
Cost of Capital
01/01/2010 632
Cost of Capital
01/01/2010 634
Cost of Capital
01/01/2010 635
Cost of Capital
01/01/2010 638
Cost of Capital
01/01/2010 639
Cost of Capital
01/01/2010 640
Cost of Capital
n
• P= C (1-t) + F ,
t = 1 (1 + kd)1 (1 + kd)n
where P = net proceeds of the debt issue, C=
Interest per annum, t = tax rate, F=
redemption price, n=
maturity period of debt.
01/01/2010 641
Cost of Capital
• Cost of preference capital: The case of
redeemable pref. capital is similar to debt, the
difference being pref. dividend is paid instead of
interest, tax is not applicable and the
discounting rate is kp the cost of pref. capital
instead of kd the cost of debt.
• So the equation is:
n
P= D + F . , where..
i = 1 (1 + kp)i (1 + kp)n
01/01/2010 642
Cost of Capital
• P = net proceeds per pref. share, D= pref.
dividend per share payable annually, F =
redemption price, kp = post tax cost of debt and
n = maturity period of pref. share.
• The approximate cost of preference capital is
given by the equation:
kp = D + (F-P)/n
(P + F )/2
01/01/2010 643
Cost of Capital
01/01/2010 644
Cost of Capital
01/01/2010 645
Financial Institutions- IFCI
• Privatisation
• Conducting the SWOT Analysis and based on
the same, to prepare an appropriate package.
• Assessment & Valuation of assets.
• Valuation of company as a going concern.
• Suggesting measures to enhance sale value.
• Financial restructuring, if any.
• Preparation of Information Memorandum.
• Bid process management:
• IFCI has successfully handled several Bid
Process Management Assignments.
01/01/2010 659
IFCI
01/01/2010 661
IDBI
01/01/2010 665
IDFC
01/01/2010 667
IDFC
01/01/2010 673
IIFCL
01/01/2010 674
IIFCL
01/01/2010 676
General: All India Financial Institutions
• In general, the wide range of categories of
financial Assistance given by the all India FIs
are:
• Rupee Term Loans; Foreign Currency
Term Loans; Underwriting of equity capital,
Preference Capital, Debentures and bonds;
Direct subscription to Capital; Guaranteeing
loans raised by industrial concerns from different
sources including commercial banks and
extending guarantees in respect of deferred
payments by importers; Bill rediscounting;
Operation of Technical Development Fund;
Soft Loan Schemes; Equipment Financing;
Lease Financing; Seed Capital Assistance;
and Risk Capital Assistance.
01/01/2010 677
SFCs, EXIM Bank
01/01/2010 679
NABARD
01/01/2010 680
International Financial Institutions- IFC
01/01/2010 681
IFC
• Financial Products:
IFC continues to develop new financial tools that
enable companies to manage risk and broaden
their access to foreign and domestic capital
markets. Its financial products include:
• Loans for IFC's Account
• (IFC offers fixed and variable rate loans for its
own account to private sector projects in
developing countries. These loans for IFC's own
account are called A-loans.)
• Most A-loans are issued in leading currencies,
but local currency loans can also be provided.
01/01/2010 682
IFC
• Quasi-Equity Finance
• Equity & Debt Funds
• Structured Finance
• Risk Management Products
• Local Currency Financing
• Subnational Finance
(Joint IFC-World Bank Subnational Finance
Department : The Subnational Finance
Department is a combined initiative of the World
Bank and the International Finance Corporation.
01/01/2010 686
IFC
• Trade Finance
• Advisory Services:
• IFC offers a range of advisory services in
support of private sector development in
developing countries.
• IFC Project Cycle:
IFC offers a wide variety of financial products to
private sector projects in developing countries.
• The project cycle illustrates the stages a
business idea goes through as it becomes an
IFC-financed project.
01/01/2010 688
IFC
• Stages of the Project Cycle
• Application for IFC Financing
• A company or entrepreneur, foreign or domestic,
seeking to establish a new venture or expand an
existing enterprise can approach IFC directly.
• After the initial contacts and a preliminary review,
IFC may request for a detailed feasibility study or
business plan to determine whether or not to
appraise the project.
• Project Appraisal
• Typically, an appraisal team consists of an
investment officer with financial expertise and
knowledge of the country in which the project is
located, an engineer with the relevant technical
expertise, and an environmental specialist.
01/01/2010 689
IFC
• Resource Mobilization
• IFC seeks to mobilize additional finance by
encouraging other institutions to make
investments in the project.
• Legal Commitment
• If the investment is approved by the Board, and
if stipulations from earlier negotiations are
fulfilled, IFC and the company will sign the deal,
making a legal commitment.
• Disbursement of Funds
• Funds are disbursed under the terms of the legal
commitment signed by all parties.
01/01/2010 692
IFC
• Project Supervision
• Once funds have been disbursed, IFC monitors
its investments closely.
• It consults periodically with management, and it
sends field missions to visit the enterprise.
• It also requires quarterly progress reports
together with information on factors that might
materially affect the enterprise in which it has
invested, including annual financial statements
audited by independent public accountants.
01/01/2010 693
IFC, ADB
• Closing
• When an investment is repaid in full, or when
IFC exits an investment by selling its equity
stake, IFC closes its books on the project.
• Asian Development Bank (ADB):
• ADB extends loans and provides technical
assistance to its developing member countries
for a broad range of development projects and
programs.
• It also promotes and facilitates investment of
public and private capital for economic and
social development.
01/01/2010 694
ADB, OECF
01/01/2010 696
FIs‟ guidelines for funding projects:
01/01/2010 697
FIs‘ guidelines for funding projects:
01/01/2010 699
FIs‘ guidelines for funding projects:
01/01/2010 702
FIs‘ guidelines for funding projects:
• Estimates of sales, cost of production and
profitability;
• Projected Profit and Loss account and balance
sheet for the operating years during the currency
of the bank‘s term assistance;
• (Financial analysis : For an existing company,
comments about D/E ratio and the Current Ratio
– whether they are in acceptable range? ----D/E
ratio < 2 and CR >1.33
• Method of depreciation followed, changes made
and their implications on profit;
01/01/2010 703
FIs‘ guidelines for funding projects:
• Revaluations of fixed assets made in the past
and the quantum of revaluation reserves;
• Status of Co.s‘ Income tax and sales tax
assessments and provisions made for the
current year;
• History of past sickness or any defaults made in
the past;
• Nature and purpose and quantum of contingent
liabilities;
• Pending law suits by and against the co. and
their financial implications;
01/01/2010 704
FIs‘ guidelines for funding projects:
• Qualified remarks by the statutory auditors)
• Proposed repayment programme;
• Projected funds flow statement covering both the
construction period and the subsequent
operating years during the currency of the term
loan;
• Details of the nature and value of securities
offered; (Comments on the type of charges to be
created, in the case of sureties be they the co‘s
directors or third parties, their networth etc.)
01/01/2010 705
FIs‘ guidelines for funding projects:
• Consents from the Government and other
authorities and any other relevant information.
(Comments on the Industrial licence if any
obtained by the co., approval of
collaboration/technical know-how agreement,
clearance for import of plant and machinery, no
objections from the local authorities, clearance
from environmental pollution angle, etc.)
• (In the case of the existing concerns) particulars
regarding the history of the concern, its past
performance, present financial position etc. duly
supported by the statements such as P & L
account and B/S for the past years.
01/01/2010 706
FIs‘ guidelines for funding projects:
• The Application in the standard format of the
lending institution duly completed in all respects,
signed by the authorised signatories and
submitted will form the basis for the detailed
appraisal of the project by the lending institution.
• After a thorough examination of the various
aspects detailed above, the institution visits the
project site or the factory site (In the case of the
existing units).
01/01/2010 707
FIs‘ guidelines for funding projects:
• Each project is examined in proper perspective
having regard to its natures, size and scope.
For example, the approach for appraising the
proposal of an existing concern going in for
expansion or modernisation , an existing
concern setting up a new project, and new
concern venturing to set up a new project will all
be different.
• The ultimate objective of the lender‘s appraisal
exercise is to ascertain the viability of a project
with a view to ensuring the repayment of the
loan with interest.
01/01/2010 708
FIs‘ guidelines for funding projects:
• In the appraisal exercise, all the data/information
should be checked and wherever possible,
counterchecked through inter-firm inter-industry
comparisons.
• When the lender is confident of the success of
the project after a thorough appraisal, it issues a
‗Sanction Letter‘ to the co. along with the
detailed list of terms and conditions/covenants;
• creation of charges in favour of the lenders;
• disbursement of the loans in stages as agreed
between the lenders and the co. depending
upon the projected cash flows;
01/01/2010 709
FIs‘ guidelines for funding projects:
• and monitoring of the progress of the project and
recovery of the interest and principal.
• Depending on the size of the loan, more than
one bank/institution may participate in the
lending with a view to share the risk.
• In such a case, the co. appoints one bank as the
‗lead bank‘ , and prepares an ‗Information
Memorandum‘.
• The lead bank enlists the services of some other
banks in sharing the lending based on the
Information Memorandum.
• This process is known as ‗Syndication‘.
01/01/2010 710
FIs‘ guidelines for funding projects:
• For term loans, the lenders also charge a
―processing fee‘ of about 1% of the loan amount.
There may be an initial repayment holiday, till
the project starts commercial production and
then the repayments of the principal and interest
due would begin at monthly, quarterly or half
yearly intervals depending on the cash flows
projected.
• Since the lending institutions will charge penal
interest on the ‗overdue‘ amounts (i.e. the
amounts of principal and or interest not paid on
due dates), the project manager has to correctly
calculate the cash outflows on account of these
dues.
01/01/2010 711
FIs‘ guidelines for funding projects:
• Usually the loan documents stipulate certain
covenants such as: the board should have a
nominee from the lenders, additional funds
should be brought in by the promoters in case
of overrun; bar to undertake any new project
until the dues are paid in full; restrictions on
transfer of shares of promoters to others,
payment of dividends with the permission of
lenders etc.
• Working Capital Advances: Used for financing
the current assets.
• In the pre-production stage, finance is given in
the form of Cash Credit/Overdraft/Letter of
Credit.
01/01/2010 712
FIs‘ guidelines for funding projects:
• Under the Cash Credit/Overdraft system, the
bank fixes the maximum amount that the co. can
draw for its operations, called the ‗limit‘.
• Interest is charged periodically on the actual
amount utilised by the co.
• The operations are reviewed at the end of every
year and then renewed for another year.
• In the case of loans, the limit amount assessed
for working capital needs of the co. is given in
the form of a loan and interest is charged on the
entire loan amount till it is repaid.
01/01/2010 713
FIs‘ guidelines for funding projects:
• In some cases, the supplier of RM may demand
an LC in which case the bank gives the LC
facility also to the co. as part of the WC limits.
• LC is opened in favour of the supplier of the
RM, and on receipt of the stipulated documents
form the supplier, the bank pays the supplier.
The amount is then recovered by the bank from
the co.
• In the post production stage, the co. sells its
products, raises bills on its customers, some of
whom avail some credit periods for repayment.
01/01/2010 714
FIs‘ guidelines for funding projects:
• The bank discounts such bills on the co.‘s
debtors and credits the amount to the Cash
Credit/Overdraft account. Thus the cycle goes
on.
• Some of the typical covenants the FIS/banks
impose in their Sanction Letters:
• The bank/FI has the right to examine the books
of accounts and inspect the co‘s factories at the
co‘s cost.
01/01/2010 715
FIs‘ guidelines for funding projects:
• During the currency of the loan:
the co. should not alter the capital structure,
should not formulate any scheme of
amalgamation/merger,
should not undertake any new project, or
expansion scheme,
should not invest or lend to others other than
normal trade credits,
should not enter into any borrowing
arrangements with any other lender,
01/01/2010 716
FIs‘ guidelines for funding projects:
should not declare dividends except out of profits,
should not create any charge on the assets of the
co. in favour of any other FI/bank or persons,
should not undertake any trading activity other
than the sale of its products,
should not permit any transfer of the controlling
interest or make any drastic change in the
management set-up.
should not repay the loans to its promoters/
directors/ friends /relatives without the written
permission of the bank,
the bank will have the option of nominating a
director on the board of the co. etc.
01/01/2010 717
Risk Analysis
01/01/2010 720
Risk Analysis
01/01/2010 721
Risk Analysis
01/01/2010 722
Risk Analysis
•Let us take an example to explain the measures.
NPV Probability
200 0.3
600 0.5
900 0.2
• The weighted NPV works out to 540.
• The Range is 700
½
• Standard Deviation = { pi (xi – xa) } where
2
01/01/2010 725
Risk Analysis
• SD and Variance are the most commonly used
to measure risk, since:
• (a) SD has the same units as the original
variable, and can be interpreted easily.
• (b) SD is the measure of dispersion which
characterises the normal distribution. If a
variable is normally distributed, its mean and SD
contain all the information about its probability
distribution,
• (c) it is easily tractable.
01/01/2010 726
Risk Analysis
• Use of subjective probabilities: Probability
distribution is required to measure the expected
value and dispersion.
• It may be possible to define the probability
distribution with a high degree of objectivity, on
the basis of past evidence.
• These are called ‗objective‘ probability
distribution.
• But in real life, such objective evidence may not
be available for defining probability distributions.
01/01/2010 727
Risk Analysis
• In such cases, the experience and judgment of
some knowledgeable persons is pooled to
define the Prob. Distribution.
• These are ‗subjective‘ probability distributions.
• Perspectives on risk: Irrespective of the
measure of risk used, there can be at least three
perspectives and they are:
• Stand-alone risk: Represent the risk of a project,
when it is viewed in isolation;
• Firm risk: (Also known as Corporate Risk‘). This
reflects the contribution of the project to the risk
of a firm.
01/01/2010 728
Risk Analysis
• Systematic risk: (also called the market risk), this
represents the risk of a project from the point of
view of a diversified investor.
• Methods of Risk Adjusted Investment appraisal:
Let us see how to incorporate the risk factor into
the investment appraisal.
• Certainty Equivalent method: This method is
based on the utility of the decision maker.
• For example consider the scenarios of cash flows
in a project and their probabilities in the second
year : Rs. 20000 – 75% and Rs. 30000 – 25% .
• So the expected inflow in the second year is
Rs. 22500.
01/01/2010 729
Risk Analysis
• The Project Manager would rather prefer a certain
outcome of Rs. 10000 rather than Rs. 22500 which
is subject to some probabilities.
• Here the Certainty Equivalent Co-efficient of the
cash flows is worked out as: 10000/22500
= 0.44.
• This method is useful when the risk-return
perceptions of the project manager differ from year
to year.
• First the certainty equivalents are calculated and
then the certainty equivalents of cash flows are
calculated.
• The cash flows are then discounted with the risk
free rate of discount, as the risk adjustment has
already been made.
01/01/2010 730
Risk Analysis
• 0 ≤ CEC ≤ 1. The higher the CEC, higher is the
confidence of the management on the
forecasted cash flows. As a general rule, the
CEC reduces for the later years as risk
increases.
• We can see an example to see how the CEC is
applied.
• A co. has cost of capital 10%, and the risk free
rate of discount is 8%, the project cash outlay is
Rs. 10 lakhs, and inflows in the first and second
years would be Rs. 20 lakhs and Rs. 25 lakhs.
The project would have a life of two years and
salvage would be negligible………..
01/01/2010 731
Risk Analysis
………The promoters‘ estimates of the CEC for the
two years would be 0.85 and 0.75. Find the risk
adjusted NPV of the project.
• NPV = Rs. (20000 *0.85)/1.08 + (25000 *
0.75)/1.082 - 10 = Rs.31.79 lakhs.
• Risk adjusted Discount Rate Method: Since
different projects have different risk levels, the
discount rates also have to be different to reflect
the risks.
• In the simple NPV method, it was assumed that
the risk characteristics of the new projects are
the same as the investments already made by
the firm.
01/01/2010 732
Risk Analysis
• But in this approach, the new projects are
discounted at the rate which incorporates the
risk element of the new project.
• So the Risk Adjusted Discount (RAD) rate i‘
consists of three components :
the risk free rate of discount r, the premium for
the normal risk of the firm u and the premium for
the extra or below normal risk of the new project,
a. i.e i‘ = r + u + a.
01/01/2010 733
Consider the following example for
understanding how the RAD is applied.
n
and SD of the NPV = t/(1+i)t i =1
i= 1
• where At = expected cash flows,
i = the risk free discount rate,
t = life of the project and
t = SD of the cash flows.
01/01/2010 737
Risk Analysis
n
(NPV) = { t 2/(1+i)2t}1/2
i=1
01/01/2010 739
Quantitative aspects of projects -
PERT/CPM, Network analysis for
monitoring of the project
• It is well known that management of any project
involves the activities of planning, coordinating,
monitoring, control and review of the
performance of a number of inter-related tasks
with limited resources.
• The Project Manager has also to be aware of the
consequences of deviations from the initial plan
– like time overruns and cost overruns.
• Therefore they look for dependable devices to
achieve proper control.
01/01/2010 740
Network Techniques
01/01/2010 741
Network Techniques
01/01/2010 743
Network Techniques
01/01/2010 744
Network Techniques
01/01/2010 745
Network Techniques
01/01/2010 746
Network Techniques
01/01/2010 747
Network Techniques
01/01/2010 748
Network Techniques
01/01/2010 749
Network Techniques
01/01/2010 750
Network Techniques
01/01/2010 751
PERT
01/01/2010 752
PERT
01/01/2010 753
PERT
01/01/2010 754
PERT
01/01/2010 755
PERT
01/01/2010 756
PERT
• Benefits of PERT:
• PERT gives management the ability to plan the
best possible use of resources to achieve a
given goal within the overall time and cost
limitations;
• It helps the project manager to handle the
uncertainties involved in programming where
no standard time data are available;
• It utilises the time network analysis as a base
method of approach to determine manpower,
material, machinery and capital requirements.
01/01/2010 757
PERT
01/01/2010 758
PERT
01/01/2010 761
PERT
01/01/2010 762
PERT
01/01/2010 763
PERT
01/01/2010 764
PERT
01/01/2010 765
PERT
01/01/2010 766
PERT
01/01/2010 767
PERT
01/01/2010 769
PERT - CPM
01/01/2010 771
CPM
01/01/2010 772
CPM
01/01/2010 774
.
The following differences may be observed between CPM and PERT:
CPM PERT
Networks are ‗Activity‘ oriented – Networks are ‗Event‘ oriented
emphasises the description associated with -
the activities in a network.
A deterministic model – cost conscious A model under Risk –
concerned with time;
Particularly useful where the decision The time for one or more
variables can be predicted with reasonable activities follow a probability
accuracies as in construction projects. If the distribution; takes into account
most likely time is known, then it may be the uncertainties.
01/01/2010
used a deterministic value 775
CPM
01/01/2010 776
CPM
01/01/2010 777
CPM
01/01/2010 778
CPM
01/01/2010 781
CPM
01/01/2010 782
CPM
01/01/2010 783
CPM
01/01/2010 784
CPM
01/01/2010 785
CPM
01/01/2010 787
CPM
01/01/2010 788
CPM
01/01/2010 789
CPM
01/01/2010 790
CPM
01/01/2010 791
CPM
01/01/2010 792
CPM
01/01/2010 793
CPM
01/01/2010 794
CPM
01/01/2010 795
CPM
01/01/2010 796
CPM
01/01/2010 798
CPM
Slack
Event EOT of LOT of =
event event LOT-
(Forward (Backward EOT
Pass) Pass)
5 28 28 0
4 20 26 6
3 12 18 6
2 13 13 0
01/01/2010
1 0 0 0 802
CPM
01/01/2010 803
The net work diagram would be as follows when the EOT/LOT are incorporated
in it. in the box showing the event no;:
2 – 13/13
1 –0/0 13
15
5 – 28/28
2
12
2
3 – 12/18 8
4 – 20/26
01/01/2010 804
CPM
01/01/2010 805
CPM
01/01/2010 806
CPM
01/01/2010 807
CPM
• Measures of variability:
• Variability in PERT analysis is measured by
variance or SD.
• The steps involved calculating the SD of the
duration of critical path are as follows:
• Determine the SD of the duration of each activity
on the critical path;
• Determine the SD of the total duration of the
critical path on the basis of info obtained in the
previous step;
01/01/2010 808
CPM
01/01/2010 809
For the example , the and variance of the activities along the critical path are
as follows:
Activity t p t o = (tp - to)/6. Variance = 2
1–2 21 9 2 4
2–5 24 10 2.33 5.43
01/01/2010 811
CPM
01/01/2010 812
CPM
01/01/2010 814
Now let us calculate the probability of completion of the project in 20, 25 and
30 days. We know the mean and .
Specified Date, D Z Probability of completion
by D:
20 (20 -28)/3.07 ≈-2.6 0.005
25 (25 -28)/.07 ≈-1.0 0.159
30 (30 -28)/3.07≈0.6 0.726
01/01/2010 815
CPM
01/01/2010 816
CPM
2 9 4 3 6
8 10
6
1 5
7
5 9
3 7 5
2 6 4 3 6
8 10
1 5 6
7
5 9
3 7 5
2 6 4 3 6
8 10
1 5 2
7
5 9
3 7 5
01/01/2010 821
Now, the new critical path is 1 -2 - 4 -6 -7 with the duration 27 weeks and
direct cost Rs. 49500.
At this stage, activity 1 – 2 has the least slope and so that activity has to be
crashed by 4 weeks, thereby reducing the duration to 23 weeks and
increasing by the direct cost by Rs. 3000 to Rs. 52500.
Now the network will change to :
2 6 4 3 6
4 10
1 5 2
7
5 9
01/01/2010 3 7 5 822
And the new critical path is : 1 – 3 – 5 – 6 – 7 with duration 24 weeks and
direct cost Rs. 52500. You can see that the activity 3 – 5 in the critical path
has the least slope and by crashing the duration is reduced by 2 weeks to 22
weeks and the direct cost increases by Rs.1200 to Rs. 53700.
So the diagram changes to
2 6 4 3 6
4 10
7
1 5 2
7
5 9
01/01/2010 3 5 5 823
Now again the path 1 – 2 – 4 – 6 – 7 has become critical with duration23
weeks and direct cost Rs.53700. Now by crashing activity 6 – 7, we can
reduce the duration by 3 weeks to 20 by increasing the direct cost by Rs.
2700 to Rs.56400.
The new critical path is shown below.
2 6 4 3 6
4 7
1 5 2
7
5 9
3 5 5
01/01/2010 824
Now the critical path is 1 – 2 – 4 – 6 -7 with duration 20 weeks and direct cost
Rs. 56400.
Now the activity 4 – 6 can be crashed, resulting in reducing the duration by ½
week to 19 ½ weeks and increasing the direct cost by Rs. 1200 to Rs. 57600.
The new critical path is shown below.
2 6 4 2.5 6
4 7
1 5 2
7
5 9
01/01/2010 3 5 5 825
CPM
01/01/2010 826
CPM
01/01/2010 827
Computer Applications in Project
Management
• The computer has now become a part of project
decision-making process. It has revolutionised the
working of the industrial and project management all
over the world.
• A lot of work has taken place on computer software.
The softwares that are available nowadays are user
friendly .
• A number of computer ‗languages‘ have been
developed based on the needs of the users.
• A lot of ‗Application Packages‘ have also been
developed.
• In projects, which are generally complex, lapses go
easily go unnoticed and as a result, wrong decisions
are made.
01/01/2010 828
Computer Applications in Project
Management
• Computers can help to avoid such pitfalls in all fields
of management.
• On any project with many activities, with
frequent updating, the computer cost will be
equal to the manual cost, but the speed,
reliability, versatility, Memory, accuracy and
other facilities will far outweigh the manual
process. Communication of the project strategy
can be common with one control document seen
by all.
• Project managers have to deal with uncertainties
and risks while scheduling activities and
allocating resources. In such cases, they have
to seek the probabilistic approaches.
01/01/2010 829
Computer Applications in Project
Management
• For example, the probabilistic aspect of critical-
path methods deals with the fact that the actual
duration of a project activity is usually a random
variable rather than a deterministic constant.
• Similar is the case with certain milestone events
where probabilistic branching of certain activities
to reach such events, should be considered.
• The Computer can aid the project management
by providing quick analysed info in any required
form, by doing the routine numerical problems at
great speed.
01/01/2010 830
Computer Applications in Project
Management
• In project management, in addition to the routine
info about the activities, activity schedules, activity
timings, key activities, the computer can give
detailed info about :
critical activities, critical events,
earliest and latest start and finishing times
of activities, critical path, slack, bar charts
of various departments, optimum time/cost,
allocation of resources, multi project schedules,
simulated PERT, bills outstanding,
location of equipment, financial info,
marketing info, key ratios etc.
01/01/2010 831
Computer Applications in Project
Management
• The revolution in computer has made project
management systems affordable and amenable to
projects of all sizes.
• After the microcomputers have been widely adopted
by the business community, abundant project
management software packages are now available.
• The software programmes support the planning and
control of such elements as work scope, contents of
a project, project timing, human resources,
budgeting, costs and communications. They also
compare the current status to the plan and so
helpful in monitoring the progress of the project and
its evaluation.
01/01/2010 832
Computer Applications in Project
Management
• Most of the WBS in project planning is now down by
the computer.
• The computer can support the project manager to
support the budgets task by task or by cost
categories, to plot the expenditure schedules and
cash flow plans.
• With the help of computers, one can reorganise the
activities, reschedule the tasks and do resource
planning in an iterative process to optimise the
schedule and resource plan.
• Tracking through the computer enables the
recording of how much work has been done, what
resources were utilised and what costs were
incurred.
01/01/2010 833
Computer Applications in Project
Management
• Artificial intelligence Expert System:
• Artificial Intelligence (AI) programmes involve
symbolic representation, symbolic inference,
and heuristic search.
• A new area of AI which is of particular interest to
project management is known as ‗Expert
System‘.
• An expert system is software that attempts to
reproduce the performance of one or more
human experts, most commonly in a specific
problem domain, and is a traditional application
and/or subfield of artificial intelligence.
01/01/2010 834
Computer Applications in Project
Management
• These programmes seek to solve practical
problems by imitating the process human
experts would follow.
• They can achieve a high level of performance in
tasks where human beings require years of
special education and experience.
• An expert system is also capable of drawing
conclusions without a predefined structure.
• It could perform the following functions:
• Monitor deviations from the planned schedule,
progress and analyse interrelations among the
various packages.
01/01/2010 835
Computer Applications in Project
Management
• Identify single potential schedule slippages. The
system would extrapolate effects of changes in
status, identify the affected items and classify
them in order of criticality.
• Pinpoint the needs for human intervention and
analysis.
• The AI based system would attempt to take
decisions on the basis of incomplete data, but
the expert system would identify the need for
data and show where human intervention would
be most effective.
01/01/2010 836
Computer Applications in Project
Management
• Show where to allocate special resources and
reserves.
• The system would extend schedule findings to
cost-to-complete by tracking cost factors
associated with work-packages. (A delay in one
would increase the cost of a later one.)
• Improve resource utilisation.
• The system would not only focus on the most
critical activities but would also point out
previously critical activities, which should be
relieved from the earlier imposed management
pressures or extra resources.
01/01/2010 837
Computer Applications in Project
Management
• Alternative resource schedules would be proposed
automatically and presented to the management for
decision.
• Multi-Project Scheduling: When several projects are
progressing simultaneously, computers are very
helpful in scheduling and allocating the resources
among the projects since the resources may be
drawn from the same common pool.
• Optimisation of the utilisation of resources is
achieved through the use of computers. The
resources in question may be skilled manpower,
staff, equipment, funds etc. which have to be
managed along many dimensions such as costs,
time and returns.
01/01/2010 838
Computer Applications in Project
Management
• Global projects, organised on a matrix basis can
be simulated to study the behaviour of client,
contractor, supplier, consultant, architect,
subcontractor, vendor, local project authorities,
local regulations, fund availability, coordination,
planning, control, monitoring, evaluation and
integrate the same from the organisation‘s
priorities.
• Computer PERT simulation:
• Simulation is very helpful in Project Management
especially in project planning through network
analysis for new product launching.
01/01/2010 839
Computer Applications in Project
Management
• Simulation is a quantitative technique used for
studying alternative course of action by building
a model of that system and then conducting a
series of repeated trials to predict the behaviour
of a system over a period of time. The desired
changes in system can be introduced for
studying their effects.
• Simulation can be used for evaluating capital
investment proposals by varying factors such as
market size, selling price, market growth rate,
market share, investment required, residual
value of investment, operating cost, fixed cost,
useful life of facilities etc.
01/01/2010 840
Computer Applications in Project
Management
• By simulating the network several times, each
time randomly selecting an activity time from
within its estimated ranges for each activity,
simulation enables the probability of an activity
being on critical path in advance and this helps
in allocating the resources in a better fashion.
• The accuracy of PERT simulation is more than
that of PERT. Random numbers generated by
the computer, which have equal chance of
representation in the sample are used to
simulate a sample.
01/01/2010 841
Computer Applications in Project
Management
• Project Managers are often faced with
considerable project uncertainties and risks and
they arise due to external factors (such as
government regulations, difficulties in financing
etc.) and internal factors ( site-location problems,
design alternatives etc.).
• There are also other constraints like
technological considerations. Network models
provide the means to model these types of
uncertainties.
01/01/2010 842
Computer Applications in Project
Management
• In particular, the computer network
simulation languages such as Q-GERT,
and SLAM provide the concepts of
probabilistic and conditional branching,
random activity times, and different nodal
release requirements for this purpose.
• This represents a significant modelling
improvement beyond the capabilities of
PERT and CPM type networks.
01/01/2010 843
Computer Applications in Project
Management
• Project Management Softwares:
• These are used in time critical allocations. A
multiplicity of project management software is
available today - each with varying approach of
performing certain basic functions of project
planning, scheduling, monitoring, control and
review.
• Now there are many project management
software packages available in India – some of
the well known are :PRISM, INSTAPLAN, PC-
Projaks, Proman, Harward Total Project
Manager, Quick Net.
01/01/2010 844
Computer Applications in Project
Management
• There are also other packages such as: Artemis
project, MAC project, Microtrak, plotrak, PERT
master, plantrak, primavision, PROB-PERt,
promis, super project expert, timeline, etc.
• At least 25 names of Project Softwares have
been listed in Wikipedia.
• Infogoal.com has the list of more than 400
Project Management Softwares.
• (See the information about some of the
softwares presently available in the Notes)
01/01/2010 845