CHAPTER THREE

3. PROJECT IDENTIFICATION

Project identification is the initial phase of the project development cycle. As the project moves
through its life cycle, different organizations, individuals, and resources play dominant roles.
Projects are born‘ ‘when a need is identified by the customer, the people or the organization
willing to provide funds to have the need satisfied. For example, for a growing family, the need
may be for a larger house, whereas for a company the problem may be a high scrap rate from its
manufacturing process that makes its costs higher and production times longer than those of its
competitors. The customer first must identify the need or problem. Sometimes the problem is
identified quickly, as in the case of a disaster such as an earthquake or explosion. In other
situations, it may take months for a customer to clearly identify a need, gather data on the
problem, and define certain requirements that must be met by the person, project team, or
contractor who will solve the problem. This first phase of the project life cycle involves the
identification of a need, problem, or opportunity and can result in the customer‘s requesting
proposals from individuals, a project team, or organizations (contractors) to address the identified
need or solve the problem.
3.1 Overviews of Project Identification

Identifying suitable project ideas is the most important step in the whole process of project
preparation. The search for promising project ideas is the first step towards establishing a
successful venture. The key to success lies in getting into the right business in the right time. The
objective is to identify investment opportunities which are feasible and promising. Generation of
an idea of producing a new product, new business, requires imagination sensitivity to
environmental changes and the realistic assessment of what the firm can do? A project is not a
product or commodity to be purchased. It has a promise as well as a risk.
An idea regarding a required intervention in a specific area to address identified problem is
formed and developed. This idea is usually hatched through discussions by specialists and local
leaders in a community need based on issues and turned into a proposal. This is an important
stage such that it can affect the whole process including that of sustainability of the project after
completion and transferring to operational phase.
However, this stage is overlooked in some cases particularly in the process of capturing the actual
needs of the beneficiaries.
Project Identification is a repeatable process for documenting, validating, ranking and approving
candidate projects. Project identification is the initial phase of the project development cycle. It
begins with the conceiving of ideas or intentions to set up a project. These ideas are then
transformed into a project. Project identification is the first and perhaps, the most crucial stage of
project cycles.
Pre-Identification Activities
"Pre-identification" is an important preface to project identification. This pre-identification stage involves:
 surveying,
 reviewing,
 Inventorying and analysis of strategies and policies, natural resources data and socio-economic
information.
Steps in project identification
Project ideas are like other ideas which don’t take concrete shape immediately. There are several stages of
making propositions their considerations and scrutiny for their soundness.
This project identification may be broadly divided into four stages, viz.
 conceptual stage – project ideas are generated;
 screening stages – at which unviable ideas are eliminated;
 identification stage – at which viable projects are selected;
 Prefeasibility state – at which prefeasibility studies are taking up.

Who Identifies Projects?

A good project comes from a good problem definition. Projects aim to address a problem or
constraint. It is vital to understand the causes of the problem or constraint, how they affect
stakeholders, and how to focus on tackling them. In case of single organization projects can
identified by: top management; steering committee; user departments and development group or
senior staff. The responsibility of identifying investment opportunities (project ideas) rests with
various individuals and institutions in the society, such as:
 Small producer‘s organizations/unions;
 Large scale individual /private sector producers;
 Product marketing organizations;
  Private sector companies (local/multinational);
 State owned enterprises and organizations;
 Government ministries, authorities, agencies, and commissions;
 Local and International Development Banks and Agencies;
 Aid agencies and self-aid associations;
 Local governments and state, regional, and sub-regional authorities;
 Local political and pressure groups such as opposition parties;
 Local and/or international NGOs; and Credit institutions and cooperatives, etc.
3.2 Generation and Selecting Project Ideas

Project ideas are generated through different sources like customers, competitors, and
employees. Sometimes they are discovered through accident. Project manager should try to

enhance people's creativity, scan the entire business environment and appraise the company‘s
strengths and weaknesses to generate a large number of ideas.
The project managers should analyze the business environment that consists of the economic
sector, the governmental sector, the technological sector, the socio-demographic sector, the
competition sector and the supplier sector. Once a pool of ideas has been generated, the
project manager should carefully screen them. Generally project ideas are generated
depending on:
Consumer needs
Market demand
Resource availability
Technology
Natural calamity
SWOT analysis
Political considerations etc.,
The project idea selection is selection of project idea from available alternatives is to be best
suited to the entrepreneurs‘ capacity, competence and willingness. The project selection
includes
 Profitability
 Feasibility
 Resource-ability
  Acceptability
The basic criterion for selection of a project could be existence of a favorable cost-benefit relationship.
People would like to select a project which requires a minimum investment, low degree of competence,
completed in the shortest time, and which has the highest return potential.
A project idea should be SMART: S – Specific objective, M – Measurable, A – Achievable, R –
Realistic and T – Time bounded. Eliminate poor ideas in the initial screening process. In the case of
financial projects, the project manager should assess the NPV of project ideas.

A search for promising project ideas could contribute towards achieving specified development
objectives. Project identification should be an integral part of the macro- planning exercise of the state
with sectored information and strategies as the main source of the ideas.
Generally ideas are formed from several sources based merely on some vested interests of the individuals
involved. However irrespective of their origin, project ideas should be in general aim at overcoming
constraints on the national development effort.
Good project ideas are the key to success. Therefore a wide variety of sources should be tapped to
analyze them. To have a wide range of options, the sources of project ideas can be categorized into two
they are: 1. Micro level sources
2. Macro level sources

Micro Level Sources Project Ideas

At micro level project ideas can be generated from various sources. Some of these are discussed below.
1. Analysis of the performance of existing industries: A study of existing industries in terms of their
profitability utilization can indicate promoting investment opportunities which are profitable and
relatively risk free. An examination of capacity utilization of various industries provides information
about the potential for further investments. Such study is more useful if it is done region wise.
Particularly for products which have high demand for consumption and wide scope for production.
2. Examination of the input-outputs of various industries: The analysis of inputs required for
various industries may throw some project ideas. Opportunities exist when {1] Materials, purchased
parts, or supplies are presently procured from distance sources with considerable time lag and transportation
cost and [2] Several firms produce internally some components parts which can be supplied at lower cost by a
single producer who can enjoy economics of scale. Similarly a study of the output of the existing industries
may reveal opportunities for adding value through further processing of the main outputs, by produce, by
products as well as waste products.
3. Review of imports and exports: Analysis of import statistics for a period of five to seven years is
helpful in understanding the trend of imports of various goods and the potential for import
substitution. Indigenous manufacture of goods currently imported is advantageous for several
reasons. [1] It improves the balance of payments situation. [2] It generates employment, and [3] It
provides market for the supporting industries and services. Likewise an examination of export
statistics is useful in learning about the export possibilities of various products.
4. Investigation of local materials and resources: A search for project ideas may begin an
investigation into local resources and skills. Various ways of adding value to locally available
materials may be examined. Similarly, the skills of local artisans may suggest products that might be
profitably produced and marketed. Such assessment may consider issues such as the human and
material resources, Infrastructure facilities and market for various products.
5. Analysis of economic and social changes: A study of economic and social trends is helpful in
projecting demands for various goods and services. Changing economic conditions and consumer
preferences provide new businesses opportunities. For example a greater awareness of the value of
time is dawning on public. Hence the demand for time saving products like prepared food items,
ovens and powered vehicles has been increasing. The other change that can be seen during analysis is
the increasing desire for the leisure and recreational activities. This has caused a growth in the
market for recreational products and services.
6. Study of new technological developments: New products are the new process and technologies for
existing products developed by the research laboratories may be examined for profitable
communication.

7. Exploring the possibility of reviving sick units: Industrials sickness is spread in many countries.
There are innumerable bossiness units which have been characterized as sick. These units either
closed are have reached the prospect of closure. A significant proportion of sick units however can be
nursed back to health by sound management, fusion of further capital and provision of
complementary inputs. Hence there is a fairly good scope investment in this area.
8. Identification of unfulfilled psychological needs: For well-established multi brand product groups
like bathing soaps, detergents, cosmetics and tooth paste, the questions to be asked is not whether
there is an opportunity to manufacture them for satisfying an actual physical need, but whether there
are certain psychological needs of the consumers which are presently unfulfilled.
9. Attending trade fairs: National and international trade fairs provide an excellent opportunity to
know about new product and developments.
10. Stimulating creativity for generation’s new product lines: New product ideas may be generated
by thinking along the following lines: Modifications, rearrangements, reversal, magnifications,
reductions, substitutions, adoptions and combinations.
Macro Level Sources Project Ideas

At macro level project ideas can be obtained from various sources as mentioned below:
1. Project ideas from government policies and plan: From time to time governments produce
guidelines such as the national development plans and session papers which spell out the directions the
government should take to achieve certain targets in various sectors of the economy and guidelines to
various organizations and individuals. The information contained in these documents is useful in
generating ideas for new projects for Ex: If the government intends to start number of new schools in a
given area then a number of projects which of related to the establishment such schools would be
considered. Government is the major source of project ideas in developing countries. Reasons: has the
necessary resources for undertaking opportunity studies (conduct survey, studies, and reviews); better
access to data and information; and familiar with the development objectives, priorities, and strategies.
3. Project ideas from technical specifications: For many industrial projects, ideas will usually tend
to come from technical specifications, which by virtue of their experience and for research findings
will give use full information which may lead to the manufacturing of new products or improving the existing
products.
4. Project ideas from local leaders: For community and social projects, local leaders usually have
important ideas, which they together with their local people, have identified as being important in
improving the welfare of the people. In the case of social projects depending in which one is to
identify, there may be number of other projects which are linked to the identified projects. Ex: A
project of constructing a dam for the generation of hydroelectric power will be giving suggestions
for the start of irrigation projects, a fishing project and other related projects.
5. Project ideas from Entrepreneurs: For commercial and industrial projects, Entrepreneurship is an
important source of ideas. Entrepreneurships include the characteristics of preparation of managerial
competence and motivation to achieve results. Although entrepreneurship skills have been passed on
from one generation to another along Family and social-economic circles, it has been recognized that
programs for entrepreneurship development will help individuals to come up with useful ideas which
can be translated into viable projects.
 Project concepts and profiles
Once a project idea has been conceived, the next stage is to describe the idea so that it can be
prioritized and move on to the next stage in the process. This may involve the preparation of
a project identification report or project concept or profile. A project concept or profile
should be short but should include answers to the following questions:
 Justification and purpose
-What goal is the project contributing to?
-What is the purpose of the project, what does it intend to achieve?
-What problem is the project addressing?
-What is the justification of the project?
-What demands, needs or opportunities is the project addressing?
-What are the main alternative ways for meeting the project’s objectives?
-What existing information sources were, or can be used, in identifying and developing the
project?
-Who will benefit from the project?
-Who identified the project?
-Who has a shared or stake in the project?
-Who will be positively, and negatively, affected by the project?
-Which institutions are targets of the project?
 Resources and institutions
What potential resources may be available for implementing the project?
Which organizations are to be involved in project planning and implementation?
 Policies and plans
How does the project proposal fit into sectorial or regional plans?
Does the project fit in to current policies of the government?
 Impacts
What are the likely the major positive and negative impacts of the project?
 Support
What is the level of the government’s support?
Does the project have the support of the beneficiaries or local community?
  Risks
What are the chances of the project achieving its objectives?
What are the main risks associated with the project?
Project Rating Index
The steps involved in determining the project rating index are as follows:
 Identify factors relevant for project rating
 Assign weights to these factors ( the weights are supposed to reflect their relative
importance)
 Rate the project proposal on various factors, using a suitable rating scale (Typically
a 5-point scale or a 7-point scale is used for this purpose.)
 For each factor, multiply the factor rating with the factor weight to get the factor
score
 Add all the factor scores to get the overall project rating index

Project Rating Index

Factor Weight Rating Factor Score
VG G A P VP
5 4 3 2 1
Input availability 0.25 0.75
Technical know-how 0.10 0.40
Reasonableness of cost 0.05 0.20
Adequacy of market 0.15 0.75
Complementary relationship
with other products 0.05 0.20
Stability 0.10 0.40
Dependence on firm’s
strength 0.20 1.00
Consistency with
governmental priorities 0.10 0.30
Rating Index 4.00
 3.3 Driving Forces for Project Identification

Business drivers are the crucial forces behind the successful development of a project. These
are:
Identification of unsatisfied demand or needs;
Existence of unused or underutilized natural or human resources and the perception of
opportunities for their efficient use;
Need to remove shortages in essential materials, services, or facilities that constrain
development efforts;
Initiatives in response to incentives provided by the government;
Necessity to complement or expand investments previously undertaken; and Desire of
local groups (organizations) to enhance their economic status and improve their
welfare.

3.4 Project Identification Studies

Identification of a new project is a complex problem. The project idea as a process of

identification of a project begins with an analytical survey of the economy (also known as pre-
investment surveys). Development projects are expressly designed to solve the varied problems
of the economics whether in the short or long run. The surveys or in depth studies would locate
the problems and the project planner will have to identify the projects that would solve the
problems most effectively. The surveys and studies will give us ideas and throw up suggestions
which would be worked out in detail later and then evaluated objectively before being accepted
for implementation. What types of surveys and studies are to be undertaken? The current
sociopolitical economic situation has to be critically assessed. The surveys and studies will give
us ideas. Identification studies may involve: - area studies, industry studies, resource-based
studies, and sectorial studies
 3.5.Project Ideas Generation Process and Approaches.
3.5.1. Project Ideas Generation Process
The project ideas generation process involves:
 Surveying, reviewing, and analyzing existing policies, resource present and socio-
economic variables.
 Natural Resources: review of the natural resource endowments of the country.
 Human Resource: review of educational standards and facilities.
 Socio-Economic Variables: review of various socioeconomic factors (includes:
housing facilities & standards, utilities services, health and nutrition services, and
income distribution).

Field survey and interview:

 Asking people regarding their needs/problems.
 Asking the public unit closest to the people about their problems/needs (what the
community needs).
Observing and analyzing prevailing situation:
 Observation & examination of current DD & SS;
 Examination of past as well as future consumption/production trends for goods and
services;
 Observing possibilities for improvement of goods and services (both in quality &
quantity);
 Observing opportunities & threats in the invention & introduction of new
technologies, etc.
Participating in deliberations, discussions, and trainings:
Participating in various discussion forums and deliberations in seminars, workshops,
and conferences (local and/or international) levels.
Brainstorming:
 Group of people suggesting different ideas (not formal).
 Exposures to Publications & Media
 Reading various publications (scientific or otherwise) and exposures to various print,
audiovisual, and visual media.
 Informal Discussions and Meetings
Exchange of ideas such as in friendship/fraternal gatherings and get-togethers.
These and similar procedures might eventually lead to the generation of various project ideas.
Here the project identifier has to concern the following points:
 Every idea may not be feasible and/or practicable.
 Some of the project ideas might be felt feasible.
 These ideas need to be ranked and/or prioritized. And then screen the potential
promising ideas.
3.5.2. Project Ideas Generation Approach

An organization can create a project using a top-down, bottom-up or a combined method. In the top-down
method, upper management comes up with the ideas for a project. In the bottom-up method, employees and
middle management create ideas for projects, and the combined method uses everyone in the organization to
come up with ideas for a project. An organization commonly assigns different teams to different parts of the
project.

By implementing a needs identification system, the organization helps to ensure the proper allocation of
assets to different projects within the organization.
1. Top--Down Approach: Projects are identified at higher planning (or macro) leveland implemented
at the decision of top officials. Projects are identified based on the national plan and strategies.
Sometimes the problem might be clearly visible – (apparently exists) – no need to go down to identify.
Due to this: Such projects may not relate to the existing reality in particular locality and it often have
long-term orientations. May encounter resistance and/or implementation constraints as the people in the
context might lack interest to cooperate with.
2. Bottom--Up Approach: Requires base line survey of resources, key development problems, and
resources. Based on the realities existing in the respective locality. May focus on short or long-term
problem solving, fulfillment of unsatisfied needs, etc. Such projects might be easy to implement
(realize) –due to their fitness to the reality in a given context. Project‘s benefits might easily be
visualized (seen) by the society. Might be successfully implemented – likely to get substantial
community support and it Might help to create good will (positive images) towards the institution/the
promoter.
3.6. Screening Potential Promising Project Ideas

Once a list of project ideas has been put forward, the first step is select one or more of them
as potentially promising. This calls for quick preliminary screening by experienced
professionals who could also modify some of the proposals. At this stage, the screening
criteria are vague and rough, that becomes specific and refined as project planning advances,
during the preliminary screening to eliminate ideas, which are not promising, and one is
required to look into the following aspects:

1. Compatibility with the promoter: The idea must be compatible with the interest,
personality, and resources of the entrepreneur. It means [1] it should fit to the personality
of the entrepreneur; [2] it should be accessible to him and [3] it should offer him the
prospect growth and high return on the invested capital.
2. Consistency with government priorities: The project idea must be feasible given the
national goals and governments regularity framework. The questions to be raised in this
context are:
is the project consistent with national goals and priorities?
Are there any environmental effects contrary to government regulation?
Can the foreign exchange requirements of the project be easily accommodated?
Will there be any difficulty in obtaining the license for the project?
3. Availability of inputs: The resources and inputs required for the project must be
reasonably assured. To assess this, the following questions need to be answered:
 Are capital requirements of the project within manageable limits?
 Can the technical know- how required for the project be obtained?
 Are the new materials required for the project available domestically at a reasonable
cost?
 If the materials have to imported, will there be problems?
 Is the power supply for the project reasonably obtainable from external sources and
captive power sources?
4. Adequacy of the market: The size of the present market must offer the prospect of
adequate sales volume. Further there should be a potential for growth and reasonable
return on investment. To judge the adequacy of the market the following factors have to
be examined:
 Total present domestic market
Competitors and their market shares
Exports markets
Sales and distribution system
Projected increase in consumption
Barriers to the entry of new units
Economic, Social and demographic trends favorable to increased consumption
Patent protection
5. Reasonableness of cost: The cost structure of the proposed project must enable it to
realize an acceptable profit with a price. The following should be examined in this regard:
 Cost of material inputs
 Labor costs
 Factory overheads
 General administration expenses
 Selling and distribution cost
 Service cost and economies of scale
6. Acceptability of risk level: The desirability of a project critically dependent on the risk
characterizing in the assessment of risk the following factors should be considered:
Business cycles
Technological changes
Competition from substitute
Competition from imports
Government control over price and distribution
Therefore, during the preliminary selection, the analyst should eliminate project proposals
that:
 Technically unsound and risky
 Have no market for the output
 Have inadequate supply of inputs
 Are very costly in relation to benefits and
 Assume over ambitious sales and profitability.
3.7. Problems for Identification of Project Ideas
Identifying potential problems before the start of a project can save the organization
significant amounts of time and money. Problem analysis is one of the most critical stages of
project planning because this stage helps to guide all subsequent analysis and decision-
making. If the project does not advance past this stage with solutions that the organization
can implement, the project should not go forward in its current form. The following causes
are taken as challenges for project ideas identification. These are:

 Ambiguity about the national development goals (objectives):

 People might not clearly know the national development goals.
 Development goals may not be well communicated, or not substantially supported
by other stakeholders.
 Priority issues in the existing development goals (objectives):
 Conflict of views regarding the development priorities and goals – might entail lack
of interest and commitment towards the pursuit/realization of these goals.
 Differences in views regarding critical aspects of national priority.
 Differences in prioritizing sectorial goals and objectives.
 Problems associated with data/information:
 Problems in data and information flow
 Constraint (bottlenecks) for accessing data
 Limited availability of data and information
 Available data may not be dependable/reliable
 Conflict of interest between local beneficiary groups:
What are the costs and benefits of the project?
who bear the cost? How to maintain the benefit in the society?
Do benefits accrue to those groups in the society who bear the cost? If yes, all right!
If no, find mechanisms to compensate those who bear the cost (to avoid unfavorable
consequences).
In a nut shell, promising project ideas pass to the next, very important planning stage –i.e.,
stage of preparation/formulation.