Applications and Project Report Preparation

Contents:
1. Meaning of Detailed Project Report (DPR)
2. Objectives of Detailed Project Report (DPR)
3. Background of Detailed Project Report (DPR)
4. Detailed Project Report for Project ‘X’

Detailed Project Report: Meaning and its contents

1. Meaning of detailed project report @@@

As the identification and intention for the implementation of the project grow, the

depth of the study for the probable project increases. Further analyses of the details

relevant to such a project become imperative.

We know that the feasibility report contains sufficient detailed information. It is from the

study of the pre-feasibility or feasibility report that approval is made by the project owner (an

individual or a project director/manager or the management of a company) for the

investment on the project or for a request to prepare the DPR.

After the planning and the designing part of a project are completed, a detailed project

report is prepared. A detailed project report is a very extensive and elaborative outline

of a project, which includes essential information such as the resources and tasks to

be carried out in order to make the project turn into a success. It can also be said that

it is the final blueprint of a project after which the implementation and operational

process can occur. In this comprehensive project report, the roles and responsibilities are

highlighted along with the risk & safety measures in case any issue arises while carrying out

the plan.
Preparation of DPR is a costly and time-taking job (which may even extend to one year)

when reports of specialists from different streams like market research, engineering (civil,

mechanical, metallurgical, electrical, electronics), finance etc.—as relevant to the project

itself—are considered in the DPR.

The following points play an essential role in deciding whether a project turns into

success:

 Completion of the project within the stipulated time period

 Priority to client satisfaction by delivering quality product with the help of the project

 Completion of the project within the set limits of escalation of cost

The blueprint design's focus has to be to convert the corporate investment into a project

idea that gives good monetary returns. A detailed project report depicts a practical

viewpoint for the implementation of the project. The requirements and risks should

also be highlighted in a detailed manner to prevent any troubles that can delay or halt

the execution of the project. Hence effective measures must also be stated so that

the execution of the project can be carried out hassle-free.

2. Objectives of Detailed Project Report (DPR): @@@

The objectives in preparation of the DPR should ensure that:

(a) The report should be with sufficient details to indicate the possible fate of the

project when implemented.

(b) The report should meet the questions raised during the project appraisals, i.e. the

various types of analyses—be it financial, economic, technical, social etc.—should

also be taken care of in the DPR.

The DPR should be thorough of all possible details to serve the
objectives and should also reflect, amongst other points, the followings
aspects: @@@

a. Technology and Design Aspects of Detailed Project Report (DPR):

Experience suggests that some projects are launched with clear objectives but with

considerable uncertainty as to whether or how they will be technically achievable, not

leading to project overruns. The DPR should deal with minimum technical uncertainties and

the specialists’ findings/report in this area becomes helpful.

Innovative designs are found to be tougher than even the technical uncertainties—designs,

as such, may appear innocuous and less costly but later, in reality, may be found

completely different. Hence the DPR should deal with Technology and Design which have

already been tested, thus minimising the technical risk.

Before going to overseas technical collaborator the repertoire of established technology

available within the country should be explored. It would be both cheaper and nationalistic!

b. Economic Aspects:

The DPR should emphasize the economic aspects of the project, which include:

a. The location of the plant, the benefit for such location including the available

infrastructure facilities;

b. The volume of the project, the capacity installed;

c. The availability of the resources and the utilisation of such resources in a comparatively

beneficial manner, e.g. the ‘internal rate of return’ projected as compared to the possible

rate of return on investment from the market without inherent risks.

C. Social and Political Aspects:

Public attitude towards a project is becoming increasingly important—the

displacement of people (Joint venture project for a major port at Gopalpur, TISCO’s

expansion project at Gopalpur) and the concerned public attitude towards, the

implementation of such a project can be very serious.

The environmental pollution, the ecological balance (or imbalance?), the potential

employment all are of important considerations in the DPR.

The importance of ‘politics’ in a major project cannot be ignored—where the political

considerations dominate. The ideal condition is that the project owners/management should

be left to manage while the government should provide the necessary conditions to make it

a success.

But, in reality, the assurance/commitments are often politically motivated even before the

finalisation of the DPR. Accordingly, the DPR should recognise this risky game.

d. Financial Aspects:

The prime importance of a project is the assurance of the timely availability of funds/

resources. The availability of funds is to be ensured throughout, i.e. during the

implementation period as well as during the second part of the project when it is

supposed to start generating income/benefit.

Whether such generation of income/benefit will be sufficient for the servicing of the

borrowed funds to pay interest and also the repayment of principal as also the expected

income from the owner’s capital invested in the project; whether such return on investment

is adequate and, also, in excess of other possible incomes from such funds without taking

the risk—these are the valid questions to be answered by the DPR.

The report also provides the ‘Break-even point’ level of workings.

3. Background of Detailed Project Report (DPR): @@@

When the project is found definitely feasible, the DPR should stand with a

background dealing with the recommendation for the project, as supported by the

forecasted details for the coming years when the project is put into operation.

The background should also include details of the product, sizes with capacity,

organisation and the technical know-how involved:

1. Project at a glance,

2. Market Report,

3. Technical details with the process involved and the plant layout,

4. Plant and Machinery and other equipment as required for the project,

5. Project Schedule and

6. Organisation. - Total strength of personnel with their grades and the required training

7. Financial details of project costs, source of financing,

8. Cost of Production,

9. Projected Profit and Loss Account,

10. Projected Balance Sheet,

11. Fund Flow Statement,

12. Interest and Commitment Charges,

13. Working Capital Requirements and

14. Debt Service Coverage.

15. Break-even analysis:

As an illustration of a Detailed Project Report we would like to produce a DPR in a

summarised form. The contents of this DPR is partly quoted from an actual report

and is partly descriptive in nature indicating, in a summarised form, what should be

the contents as under the relevant headings.

The product names, the amounts in quality and value are for illustration only with the idea to

describe a model DPR. Some points are narrated by way of description within brackets,

instead of the actual contents of the report. All descriptions and figures are for illustration of

a DPR.

Contents of a detailed project report

A detailed project report must include the following information:

 Current International and National scenario related to the Project.

 Growth driver for the project.

 Brief information about the project

 Experience and skills of the people involved in the promotion of the project

 Details and practical results of the industrial concerns of the promoters of the project

 Project finance and sources of financing

 Government approvals

 Resource requirement

 Details of the requisite securities to be given to various financial organizations

Other important details of the proffered project idea include information about management

teams for the project, details about the building, plant, machinery, etc.

A detailed project report is extremely important in order to turn the idea of your project into a

reality. A DPR acts as a ladder towards success to make your project reach great heights. If

the project report is prepared by putting a tremendous amount of effort into details, you will

surely get good results later.

The DPR facilitates:

Managing the budget - Managing the budget or expenditure is not an easy task, especially

when you have to look at so many aspects of your project. Hence a DPR comes to your

rescue and helps your plan and manage your budget in such a manner that you do not go

over your set budget.

Minimizing risks - Sometimes, despite giving great attention to details, risks, and issues

arise during the implementation of the project. Hence it is crucial to identify and reduce

these risks as much as possible so that the project is implemented without any hassles. It is

reporting the risks to the project manager before the implementation that makes room for

improvement.

Project progress follow up - One of the most important aspects of a detailed project

report is to have a control on the project progress. Accordingly, one can keep track of the

schedule of the project and eliminate the problems, if any.

Hold over the project - Project reporting maintains hold of the higher authority, such as

managers, over the project so that they can keep a check on progress and eliminate factors

that cause a halt in the progress of the project. The performance of the team members and

their quality of work is also checked.

A detailed project report has innumerable benefits in order to drive a project towards

the path of success. Hence it is vital to get a DPR prepared from an experienced

person/firm that holds relevant experience and skillset to leave no stone unturned. It

is also important that the person who is a part of the team for the project has relevant

expertise in the field so as to take up the task of handling the project. Putting the

DPR's preparation task into the hands of an inexperienced person can also cause

you to lose a lot of money, so choose wisely.

Detailed Project Report for Project ‘X’:

1. Background:

A. Organisation

A Greenfield project to be launched by Indian promoters in partnership with a foreign

company renowned in the relevant business along with their equity participation and a
representation in the company’s board.

B. Product:

Manufacture of products L, M, N etc. are mainly used in the medical field. These products
are not currently manufactured in India, except one or two units with quality reportedly
inferior to international standard. Hence, there is a need and opportunity felt by the
promoters, as the project is favourable for the saving of foreign exchange.

C. Technical know-how:

The know-how, along with the supply of the major plant and machineries, are to be provided
by the foreign partner, who is well experienced in this field.
The required training of key personnel will also be provided by the collaborator. ‘

The participation in equity by the foreign company and also the terms of the ‘know-how
agreement’ have been approved by the concerned authorities.

The collaborator is ready to buy-back the entire production, but it has been agreed that
about 20% of the total production will be marketed in India. In view of this, the company has
been identified as an Export Oriented Unit (EOU).

2. Project at a Glance:
A. Product:

L, M, N etc. for Medical Instruments.

B. Capacity:

35,000 pcs per annum.

C. Production:

Financial Year (Fy) 1 2 3 4 5

In ‘000 pcs 9 15 22.5 30 33.75

D. Sales:

Rs. (L) 360 600 900 1200 1350

E. Project costs in Rs. (L)

Land 30

Building 150

Plant & Machineries 525

Tech. Knowledge Fee 30

Pre-Operative expenses 50

Interest and commitment Charges 20

 Margin Money 35

Contingency on Plant & Machineries 60

(10%) & Buildings (5%)

Total 900

F. Source of financing

 Equity Participation:
a. Indian Promoters : 225
b. Foreign Investors : 200
___ 425

 Term Loan from Financial Institutions 475

____
Total 900
___

3. Report on the Market Research on the Product:

The special report indicates:

a. Expected volume of the market and its growth;

b. Expected volume of the market share;

c. The possible marketing channels and the need for the specific background of the dealers;

d. The dealers’ expectation about their commission, discounts etc.;

e. The credit period to be extended to the dealers, major customers etc., the prevailing

market trend in this area;

f. The requirement of service after sales;

g. The behavioural pattern of the ultimate customers and their reaction to the availability of

such products. (This is a delicate area and depends upon the sectors of the customers to

whom the product is addressed housewives, executives, professionals, doctors etc.

In the project under discussion, the customers are primarily the doctors who are interested

in the usage of the L, M, N etc. for medical instruments

h. The competitors, their strength and weakness and their market share.

4. Technical Details:
The usage of the product helps by directing a beam of laser light down a fibre and the

operating surgeons can perform intricate surgeries inside human bodies, sometimes even

eliminating grossly invasive and traumatic procedures involving cutting of healthy body

tissues to reach the operating site.

The details of the products include:

A. Products:

i. ‘L’: There are strands of high purity element with cylindrical inner core with high refractive

index. The outer shell are called cladding with comparative lower refractive index, the light

rays propagating within the core of the fibre is reflected back into the core.

The fibre dia. varies between x microns to y microns and, as such, can work as flexible light

cables.

ii. ‘M’: This is used to transmit light through flexible cables.

iii. ‘N’: This is ideal for usage as an accessory for surgical microscope in Ophthalmia,

Gynecology, Plastic and Neuro-surgery etc. where temperature is a critical factor.

B. Manufacturing process:

Fibre drawing:

The fibres are drawn from the element which is melted in a furnace. The process draws

continuous length of fiber from the melting element whose softening temperature is lower

than that of quartz; then the fibers are wound in large drums.
The other operations to follow include:

i. Fibre cleaning and washing;

ii. Fibre laying and cutting;

iii. Sheathing;

iv. End fitting;

v. Epoxy curing;

vi. Grinding and polishing; and

vii. Quality inspection.

(Similar description of the process for the manufacturing of R and S are narrated in the

DPR.)

C. Plant layout, Process Layout:

The project report includes a diagram of the plant layout, Process Layout taking care

of:
i. The suggestions from the building architect.

ii. The site, the plant drawings with the locations of the machineries, center for power house,

the power connections.

iii. The process work flow, taking care of the flow of the materials, manufacturing process

and delivery to the finished goods store.

iv. The passage for the inward delivery of the raw materials, their receipts, incoming equality

inspections etc. should not cross the passage-for outward delivery of the finished goods.
Similarly, within the manufacturing area, the production process centers follow the serial
order of the production processes, with facilities for issue of the raw materials to the

relevant process centre, their movements without disturbing other process centres.

There should be scope of ‘quality inspection’ in the stages of production process. The layout

should take care of the delivery of the finished goods to the finished goods store with least

disturbance of other movements within the production floor.

The basic idea of the layout should also take care of:

i. The required space per head for direct workers;

ii. Movement of materials and men should be without interruption;

iii. Convenience to supervise with a clear overview for the plant manager;

iv. Utilities including toilets, canteen, first-aid room, rest room etc.; and

v. Security aspect.

5. Plant and Machinery:

The plant and machinery required for the project include:

i. Drawing Tower;

ii. Grinding and Polishing Machine;

iii. Diamond Wheel Saw/Cut-off Saw;

iv. Epoxy Curing Oven;

v. Electrolytic Etching Machine and

vi. Optometer.

The auxiliary service equipment includes:

i. Power requirements for the plant;

ii. Utilities: water for the manufacturing process, air-washing plant;

iii. Equipment for maintenance workshop and

iv. Requirements for Pollution Control.

6. Project Schedule:
The project report should have complete details of the estimated time schedule for the

implementation of the project from the start till the final ‘trial run’ i.e. just before the start of

commercial production.

The essential main steps for the implementation are listed in serial order of such steps.

Such steps are then chronologically arranged along with the estimated time to complete the

works involved in each step.

While the actual step is to be taken at a certain point of time—whenever the situation

permits—the necessary preparatory work should be carried out earlier so that the step can

be taken in time.

For example, before a placement of order to an overseas supplier and opening of the

necessary Letter of Credit (LC), the preparatory works include:

a. Establishment of the specification of the materials to be ordered along with its qualities;

b. Enquiries and their responses from different suppliers;

c. The time schedule required for deliveries;

d. The final payment terms;

e. The quality and the replacements in case of defectives/damages;

f. The insurance coverage;

g. The arbitration, in case of disputes etc.

 Similarly, the appointments of senior personnel such as Production Manager, Supervisor,

technical hands, finance and administration, personnel, security etc. must precede the

appointment of Directs and Indirect in the plant.

The Project Time Schedule with work packages in project implementation and time

plan is presented as per the following bar chart:

Activities Time W1/ W2/ W3/ W4/ W5/ W6/ W7/ W8/

M1 M2 M3 M4 M5 M6 M7 M8

Considerable amount of work is involved in procurement of materials from overseas,

placing order with the delivery schedule, opening of letter of credit etc. including:

a. Quality of material available from different suppliers;

b. Time schedule required by suppliers for delivery;

c. Competitive prices, taking care of cost, insurance freight and inland transportation;
d. Replacement in case of defectives/damages, the relevant terms in this regard;

e. Arbitration in case of dispute.

Besides the preparatory works necessary before the start of every major step as illustrated,

there are also innumerable types of work involved in the business of starting a project,

which may not be possible to describe in the Bar Chart. For example, before recruitment, it

is desirable to decide the ‘personnel policy’, the various grades, the market rates and the

rates and scales to be offered.

These things should be discussed, deliberated and finalised before the starting of

recruitment process.

Depending upon the gradual increase in the volume of production, recruitments should also

be phased accordingly and appointments of key personnel including seniors should also

precede the recruitment of the Directs as the suggestions/discussions of the functional

managers and supervisors play an important role in this area.

The Project Schedule becomes a tool to ensure timely implementation of the project

and an aid to achieve the project objectives of Time, Cost and Quality. A delay in any

step may lead to further delay of the subsequent steps and, as such, it may

accumulate.

The Project Schedule helps the management to review the progress and, thus,

control the implementation while reviewing the actual progress against the

schedule/budget.

Even the ‘possible delay’ is analysed and all means explored to avoid the delay and

maintain the time schedule. This is so important in every project implementation that the

Project Manager maintains chart in his office showing the actual process as compared to

the budgeted schedule, continuously updating the progress with the passage of time.
7. Organisation:
Considering the detailed volume of activities in Production, Selling, Administration and other

support services, e.g. Procurements, Personnel, Maintenance etc., man-power

requirements at different grades/levels like Manager, Supervisor, Skilled, Semi-skilled,

Unskilled and other work-forces are estimated for each functional group.

Pay scales for different grades should be ascertained and clearly defined to avoid

anomalies/disputes in future. Recruitments should be planned in accordance with the

strength of work-force required as per the volume of activities forecasted in stages.

Considering the prevalent rates (in different grades) and the projected number of employees

—salaries and wages are estimated. The personnel costs, e.g. medical, uniform, leave pay,

bonus, canteen subsidy etc. should be added up as the total of such costs may even mount

up to 25 to 30 per cent of salary itself!

8. Project Costs and Source of Finance:

[The project report should contain the salient features of the project costs as per the major

heads of accounts.]

The project costs of Rs. 9.0 crores are detailed as follows:

Rs.(L)

A. Land and site development. 30

B. Building and supporting utilities:

 Civil constructions. 60

 Sanitary, Plumbing, Water supply 30

 Electrification 30

 Air Conditioning etc. 30

____
 150

C. Plant & Machineries

 Machineries including freight 490
Insurance etc.
 Installation charges 10
 Technical fee 10
 Associated equipment viz compressors 15
Computer systems etc.
525

D. Technical Know-how fee 30

E. Pre- operative expenses 50

F. Contingencies 60
G. Interest & Commitment charges 20
H. Margin Money 35
900

The project costs are codified and summarised along with the sourcing of the fund

required for the project:

Notes:

1. Preliminary/pre-operative expenses:
This includes all preliminary and preoperative expenses on overheads during the initial stage and up
to the time of starting commercial production and sale of the projected product/service. These
expenses are initially capitalised and subsequently written-off charging the Profit and Loss Account
during a period of 10 years.

2. Interest and commitment charges:

This includes interest and commitment charges on borrowings. It also includes charges by the
Financial Institution (as their administrative charges) providing the Term Loan. Withdrawal of Term
Loan is made by phases, as per the fund requirement.

The DPR shows estimated detailed movement of the Term Loan with the interest calculations: for
the period of the project implementation. When the project starts operation and earnings, the
repayment of the loan as permitted by the liquidity position is also reflected in the detailed
movement.

3. Margin money:
Besides the capital costs for the project, the cost for the project being fully implemented, funds are
required on account of revenue expenses for starting of operation including cost of raw materials
etc., the inventory required, the level of credit sales in the form of debtors, in short the Working
Capital.

This is normally funded by bank and the bank permits such funding restricted to a certain
percentage of the level of current assets, i.e. inventory and debtors. The balance is called the
margin money for working capital (all fixed assets already hypothecated with the Financial Institution
providing the Term Loan). This ‘Margin Money’ is also considered part of the ‘Project Costs’.

4. Contingency:
It represents a buffer to cover the risk of actual cost of the capital items being in excess of the
estimated costs as considered in the project cost.

5. Cost of production:
The DPR deals with the financial estimates of the project operation for five to eight years

from the start of the commercial production. In our discussion hereinafter we have dealt with

such estimates for five years.

The report shows under this head the details of the cost of production depending upon the

envisaged volume of activities.

The estimated cost of production for initial five years is shown in the following table:

Cost Rs. (L)

Sl. No. Particulars Yr.1 Yr.2 Yr.3 Yr.4 Yr.5

1 Production Quantity in Pcs

2 Sales

3 RM Cost (Imported +Local)

4 Utilities

5 Labour
 6 Factory Overheads

7 Total Direct Cost of

Production (Add row 3 to 6)

8 Administrative overhead

9 Total Cost of Production (Add

row 7 & 8)

10. Profit and loss account:

Yr.2 Yr.3 Yr.4 Yr.5

Sl. No Business Attributes Yr.1

1 Sales

2 Closing stocks (FG+WIP)

3 Total (1+2)

4 Opening stock (FG+WIP)

5 Raw Material Consumed= Op stock+

Purchase -Cl stock

6 Utilities+ Overheads+ Wages

7 Cost of sales= (4+5+6)

8 P & L B’fore Depreciation (3-7)

9 Net P&L (8-Depreciation+Int on W.C &

Loan+ Tax)
Note:

1. Negative figures are shown within brackets.

2. Being an EOU no tax on profit during the initial years.

3. Due to availability of sufficient profit, Interest/Commitment Charges/Preliminary and Pre-

operation expenses are written-off in full in 3rd year.

11. Balance Sheet as at the end of the year:

12. Fund flow statement:

Sl. Source Period 1 2 3 4 5 Remarks

No.

1 Opening Balance

2 Add: Share capital+

Loans+ Debt collection

3 Sub Total

4 Less Payments:

Purchases+ Utility

charges +Salary/Wages+

Overheads+

Payment of loan &

Interest

5 Closing Balance=3-4
13. Interest and commitment charges:
Interest and Commitment Charges @ 8.5% p.a.

On (A) 55 full 11 months plus, (B) On 285 for 8 month plus, (C) On 25 for 5 months.

Note:

1. The expenses under this head in a new project is also capitalised like the Preliminary and

Pre-operative expenses and are written-off when the organisation starts its commercial

activities of Production and Sales.

2. The rate of interest is taken as about half the rate of charges for interest for the purpose

of averaging, as withdrawals of the term loan required are not necessarily at the beginning

of the period. The rate of 8.5% p.a. as above also includes estimated commitment charges

for undisbursed balance of the loan.

14. Working capital requirements:

The DPR also shows the detailed calculation of the working capital required by the project

to carry out its operation including procurement of materials, and the overhead costs for the

production activities and the level of debtors for the credit sales.

The working capital represents the net current assets, i.e. the Current Assets less the

Current Liabilities and, as such, generally includes: Inventories for Raw Materials, Finished

Goods, W.I.P.; Debtors (less creditors); Overheads for 1 to 2 month(s).

It is desirable to work out the policy for the level of inventories which will be depending upon

the circumstances of individual cases, e.g. for imported raw materials, because of longer

lead time, the inventory level may be between 4 to 6 months, whereas for local off- the-shelf

items—one month,, and made to order supplies—may be 3 months.

Debtors level may be of 1 month’s sales if the company allows 30 days’ credit to debtors.
From the total of all these items, an assessment is made about the possible percentage of

the value of total current assets which the banker is ready to finance. The balance amount

of funds, blocked in the net current asset, is called ‘margin money’ and is treated as part of

the project cost.

The DPR shows the detailed calculation of the Working Capital and also the Margin Money.

Working capital requirements:

Sl. No. Item Description Yr.1 Yr.2 Yr.3 Yr.4 Yr.5

1 Raw Materials

2 Consumables

3 Labour

4 Overheads

5 Finished +WIP stock

6 Debtors

7 Total (1 to 6)
While the ‘amount required’ column shows the organisation’s money tied up in net Current

Assets (the phenomenon of creditors is ignored), in spite of such assets being

hypothecated, the Banker’s norm to lend money is not 100% and, as such, there are

shortfalls for which ‘Margin Money’ is required. In this case the margin money is (in the first

year) about Rs. 40 lakhs, i.e. 116.00 minus 77.32.

15. Break-even analysis:

The DPR shows a detailed calculation to indicate the level of activities (with the projected

figures), when the organisation breaks even. We know that the excess of sales over the

variable costs is called the ‘contribution’, that is, the contribution towards the company’s

fixed costs and the contribution in excess of the fixed costs represents the profit margin.

From the details of estimated sales and the projected cost structure, the particular level of

activities is worked out to find when the ‘contribution’ equals the fixed costs and this level of

activities is called the break-even point.

The components of the total cost is analysed to (1) the fixed cost and (2) the variable cost.

As the company’s activities are not stabilised during the initial years the break-even level is

worked out from the details of the projected Profit and Loss Account of the third year. The

Break-even analysis of the DPR is shown hereinafter.

Note:

The allocation of costs between ‘fixed’ and ‘variable’ is to a certain extent arbitrary. The

fixed cost does not remain fixed at all levels and scrutiny of some variable costs may reveal

that some part of it may be treated as fixed.

However, traditionally, expenses like Direct Costs are treated 100% variable and expenses

in the nature of Depreciation as 100% fixed; the overheads are arbitrarily apportioned,

considering the nature of expenses as revealed from the scrutiny of the costs.
16. Break-even Analysis

Break-even point, based on the activities at the third year’s operation is,

Fixed Cost/ Contribution x 100 = 214/454 × 100 = 46,

The project should break-even at the operating level of 46% of contribution

Project Report in ‘Offer Document’ Inviting the Public for Subscription to
the Organisation Implementing a Project:

Project report when developed to a DPR with details of functional analysis and estimations

of higher accuracy is appraised for making important decisions.

Such appraisals are made by the project owner for finding the rate of returns (when

such owner is a private sector), by the government for cost-benefit (including the

social welfare when the project is intended as such) by the financial institution for

deciding to lend the fund. This report is also of immense importance for the project

management while instituting control in project implementation.

We will now detour from the normal text and discuss how a project report is used in the

‘offer document’ a document which includes, inter alia, main features of the project and is

distributed to the public for public issue inviting their applications for Share Capital,

Debentures etc. requiring such funds for the organisation implementing the project.

There are in such ‘public issue’ lead managers to the issue who is supposed to verify all

contents of the document (it also includes the terms of application, terms of debenture

redemption etc.) and a copy of such document along with the verification certificate are

submitted to SEBI, whose approval is required for any public issue.

We will now illustrate an ‘offer document’:

A. Project:

1,350 tonnes per day (MTPD) new ammonia project. Ammonia from this plant will be used

for in-house consumption as a feedstock for fertilizers already being manufactured by the

company. The company has existing plant for manufacturing ammonia of 950 MTPD and

the new plant will, eventually, replace the old plant.

B. Background:
The company’s activity during the initial years was manufacture of fertilizers, while ammonia

was sold as a by-product. Subsequently, the company diversified to other products like

Nylon-6, Melamine and promoted a joint venture (with State Government share of 26% and

own share of 25%) for manufacturing Ammonia and Urea.

The company has taken over one unit manufacturing Nylon Filament Yarn and Nylon Chips

and another unit, which is now ‘Polymers Unit’, manufacturing 5,000 tpa polymers.

Note: Project in joint sector, project for diversification.

C. Location:

The plant is located within the present activity site where space is no constraint. The

suppliers of the feedstock, Natural Gas and also Naphtha are also located in the

neighbourhood with all convenience for the supply of raw materials and, being housed with

the present activities, the finished product can be conveniently used for captive

consumption.

D. Project cost and means of finance:

The company’s project was initially appraised by IDBI in 1994 with the estimated project

cost of Rs. 750 crores. Initially, the raw materials envisaged for the project was natural gas.
However, to enable the project, to have a greater flexibility, changes were made in the

equipment design, drawing etc. for the use of naphtha as an alternate feedstock.

This change along with the increase in the Customs Duty etc. duty to change in rupee

parity raise caused a revision of the project cost finalised at Rs. 1,030 crores as

detailed below:
Note 1

Details of Rupee Loans from F.I. and terms:

Other terms:

1. Upfront fee of 1.05% on loans are payable.

2. Security—first mortgage and charge on all the company’s movable and immovable

properties.

3. Repayment by 24 equally quarterly installments commencing from April 1, 1998.

Note 2:

Details of Foreign Exchange Loan as duly approved by RBI.

A. WFK Germany 135.4 million DM with the terms:

i. interest @ 7.32% p.a. payable semi-annually;

ii. one time management fee @ 0.25% on loan amount;

iii. commitment charges @ 0.375% on undisbursed loan amount payable quarterly from

20.11.1992.

iv. repayable by 14 equal, consecutive, semi-annual installments payable on 30th

December and 30th June on and from 30th June on and from 30th December 1997.

v. security payment guarantee of IDBI and SBI.

B. XYK 42.5 million DM:

i. interest @ 7.35% p.a. payable semi-annually;

ii. other terms same as (A) above.

Note 3:

The company proposes to raise about Rs. 280 crore through Euro Issue/Public based on

timing of the fund requirements and suitability of the market conditions.

E. Market and competition:

Almost the entire production of Ammonia will be used for captive consumption. Part will be

used for production of Urea. Various other players in the industry have also announced

capacity expansion in Ammonia and Urea.

As per report on the fertilizer industry (December 1995) demand for Urea in India is

expected to increase from 16.4 million tonnes in 1994 to 20.8 million tonnes in 2000 A.D.

India would continue to be one of the largest importers of Urea with around 4.9 million

tonnes of imports till 2000 A.D.

F. Capacity:

The capacity utilisation of the new Ammonia Plant for four years after the commercial

production from October 1997 is estimated as

Year 1 80%

Year 2 90%

Year 3 95%

Year 4 95%

G. Technology arrangements:

Agreements for technology involved with the technical contractors and the process

licensors have been finalised as follows:

1. Engineering contractors:
ABC of Germany a leading company in the field of engineering and contracti ng, material

handling, refrigeration and industrial gases. The company will offer licence, know-how, basic

engineering and design, training and expatriate services for detailed engineering.

2. Licence:
Process 1: From BCD of Germany with a fee of DM 8, 40,000; Process 2: From CDE of

Switzerland with a fee of DM 1.149.999;

The total licence fee of DM 1.989.999 will be paid as:

i. 5% upon effective date of contract;

ii. 28% upon disbursement of loan agreement;

iii. 33% upon 5 months from the date of contract or on completion of basic engineering,

whichever is later;

iv. 34% upon acceptance of the plant, at latest 39 months from the effective date of
contract.

H. Production process:

The generation of pure ammonia synthesis gas is achieved by adding nitrogen to the pure

hydrogen produced.

The process plant is divided into the following sections:

i. Naphtha storage—pre-treatment;

ii. Natural gas compression;

iii. Generation of hydrogen and purification;

iv. Ammonia synthesis based on ‘Casale’ process; and

v. Refrigeration.

I. Raw materials:

The process technology selected as such that either naphtha or natural gas or a

combination of the two can be used as feedstock. Natural gas is distributed by a local

company and requirement for the plant is now under consideration by the company.
Additionally, a Memorandum of Understanding (MOU) has been signed for supply of 3.6

lakh M.T. of Naphtha.

J. Utilities:

Power:

The new plant has been conceived on a standalone basis and a 21 MW electro- generator

has been incorporated in the design of the plant. A 100% capacity requirement is estimated

as 19 MW. There is also a provision for emergency power generator.

Water:

The nearby river will be a source of raw water as approved by the State Government. The

demineralised water (DM) will be met from the company’s water treatment facility.

Steam:

Waste heat boilers in the plant will supply high pressure, steam and the medium pressure

steam will be met from the Turbine of the synthesis gas compressor.

Compressed air:

This will be drawn from the Air separation unit.

K. Manpower:

The plant will employ 44 officers and 123 technicians for the operation and administration of

the plant. Availability of key personnel has also been finalised and the company does not

have any difficulty of fresh recruitments.

Personnel will be imparted adequate training in the company’s own Training Institute as per

the plan.

L. Environmental clearance:

The plant indicates treatment of all factory effluents before it is discharged into the common

effluent channel. The State Pollution Control Board has already issued a NOC for the plant.
M. schedule of implementation:

N. Risk factors and management’s perception of the same:

(a) Internal:

The manufacturing plants are operationally interlinked.

Management perception:

The company maintains high safety standards, hence functioning of one plant does not
affect the functioning of another.

(b) External:

The profitability of the fertilizer operation is dependent upon the government’s subsidy policy

which may come to the end by 31st March 1997.

Management’s perception:

Government is beginning the process of preparing the fertilizer subsidy policy commencing

from April 1997.

O. Financial projections:
As the project is planned within a large existing plant the financial projections of the new

ammonia plant, separated from all other activities of the company, are not available in the

offer document and the projections are for the company as a whole. Hence, not discussed

here.

10. Broad Criteria for Pre-Investment Decisions:

The development of a project report, we know, passes through the stages of Project Profile,

Project Pre-feasibility and feasibility report, the techno-economic feasibility report and the

DPR.

Somewhere at these stages, a tentative decision is made by the project owner/

management for investment in the said project but before a firm decision—certain principles

—which are the standards for judging the project and launching on it—are applied and

followed. This exercise is called the criteria for pre-investment decision.

We know that different considerations are applicable to different projects, and the projects

for different sectors. Because projects are of innumerable types, these criteria vary with

different projects.

However, considering their commonality, we summarise below the broad criteria

applicable to pre-investment decisions for a project:

A. Objectives and attitude:

The project is to satisfy the basic objectives for which the investment is planned. There

should be good, positive attitudes of the project owner, parent company—if any—and the

senior management involved. There should be a clear commitment for such a project.

B. Definition:

The definitions should be comprehensive and clearly communicated including:

i. The various study on the project, carried out in an orderly fashion. In the absence of clarity

in any, area further support study should be carried out in the relevant area.
ii. Any area of uncertainty in the technology and/or design should be followed up till a clear,

acceptable technology/design has been arrived at. The technology/design should be tested

already (may be even in some other project).

C. External factors:

All external factors which are likely to influence the project (including its

implementation) should be recognised, e.g.:

i. Effect on prices;

ii. Relevant rules and regulations;

iii. Community factors, particularly in the neighbourhood of the site. (Note the big public and

environmental outcry about the Rs. 1,800 crore project for Gopalpur port, the Tehri Dam

project etc.).

iv. Political support for the project, if any.

D. Financial aspect:

1. There should be full financial analysis of the project due to the project risk undertaken.

2. The availability of the funding should be completely appraised till the commissioning of

the project. In deciding about the total commitment, care should be taken to find out

i. opportunities available in the market;

ii. can the resources be alternatively used to serve the objectives;

iii. how does the implementation reflect cost-benefit ratio.

3. Recognize that government finance may develop to political control on the project itself.

E. Organisation:
Is there a proper organisation, particularly in the managerial grade, to match the project size

and complexity so that there are no untoward surprises in the course of its implementation.

The organisation should be manned by competent personnel for resource management with

firm and effective leadership.

F. Schedule:

The project should have a good planning with clear schedules and adequate back-up

strategies, particularly for high-risk areas. Proper planning of the Quality Assurance (QA) is

recognised.

G. Communication and control:

The system of communication in implementation and operation and the necessary control,

as such, should be instituted in the proposed project as visible, simple and friendly.

H. Resource allocation:

Before making a final commitment on the project, particularly large projects with longer

duration, a study is made to review whether other alternatives are available to satisfy the

objectives. Or, does it entail the consumption of least resources for such a project?

This is a matter of serious consideration in cases of major government projects as:

i. development of railways;

ii. building of national highways;

iii. development of major airports, harbours etc.

The commitment involves resource allocation for years and, as such, a meaningful serious

consideration before the start of investment.