Chapter II

Project Identification
Project identification is the first step of a new venture. Theoretically, an investor has an
infinitely wide choice with respect to investment opportunities. The important
dimensions of choices are; Products/ services, Technology, Equipment, Scale of
production, Location, Incentives and Time phasing. The task of identifying a feasible and
promising project is somewhat difficult. Moreover, it is interrelated with the government
policies, infrastructural developments and skill of people. Project identification is
concerned with collection, compilation and analysis of economic data for the purpose of
locating possible opportunities for investment and with development of such
opportunities.
2.1 Sources of project ideas
There are multiple sources of project idea. Project ideas will contribute to the realization
of development objectives.
Sources of project ideas can be classified as follows:-
1. Macro source: refers to the source of project idea, which is reflected from
national, regional and sectoral level sources.
Example
 Lack of foreign exchange (trade deficit) requires export oriented projects or
import substitution oriented projects
 Natural disaster such as drought, earthquake or flood requires resettlement
projects and flood control projects like dam
 Multilateral or bilateral development agencies,
 Regional or international agreements in which a country participates, etc
2. Micro source: refers to the source of project idea, which is reflected from
community or individual level sources
Example:
 Identification of unsatisfied demand at community level. Example ;
Drinking water problems require water supply projects
 Existence of unused or underutilized natural or human resources.
Example; using various rivers for irrigation purpose.
During identification, the analyst should eliminate project proposals that:
 Are technically unsound and
 risky Have no market for the

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  output Have inadequate
 supply of inputs
 Are very costly in relation to benefits
 Assume over ambitious sales and profitability, etc.
As a result, some of the project alternatives will be rejected and those the are promising will be
advanced to the next stage called project preparation.
Another way of classifying sources of project ideas is:-.
Some may be “resource based” and stem from the opportunity to make profitable
use of available resources.
Some projects may be “market based” arising from an identified demand in
home or overseas markets.
Others may be “need-based” where the purpose is to try to make available to all
people in an area of minimal amounts of certain basic material requirements and
services.
Well – informed technical specialists and local leaders are also common sources
of projects. Technical specialists will have identified many areas where they feel
new investment might be profitable, while local leaders may have suggestion
about where investment might be carried out.
Ideas for new projects also come from proposals to extend existing programs.
In general, most projects start as an elementary idea. Eventually, some simple ideas are
elaborated into a form to which the title “project” can be formally applied.
Scouting for project ideas
1. Analyze the performance of the existing industries
2. Examine the inputs and outputs of various industries
3. Review import and export options
4. Study plan outlays and government guidelines
5. Look in to the suggestions of financial institutions and development agencies
6. Investigate local materials and resources
7. Attend trade fairs
Good project ideas are the key to success. The above variety of sources should
be considered to identify good project ideas
2.2 Project Ideas and Opportunity Studies
Opportunity Studies: The identification of investment opportunities is the starting – point
in a series of investment – related activities, when potential investors (private or public) are
interested in obtaining information on newly identified viable investment opportunities.

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 The main instrument used to quantify the parameters, information and data required to
develop a project idea into a proposal is the opportunity study, which should analyze:
- Natural resources
- The existing agriculture (basis for agro- industry)
- Future demand for consumer goods
- Imports substitution and export possibilities
- Environmental impact
- Expansions of existing capacity
- Manufacturing sectors (successful in other countries)
- Diversification
Opportunity studies are rather sketch in nature and rely more on aggregate estimates than
on detailed analysis. Opportunity studies could be general or specific.
General opportunity studies (sector approach) could be area studies designed to
identify opportunities on a given area (Administrative province, backward region),
industry studies to identify opportunities in delimited industrial branch and resource –
based studies to reveal opportunities based on the utilization of natural, agricultural or
industrial.
Specific project opportunity studies (enterprise approach) are seen in the form of
products with potential for domestic manufacture. A specific project opportunity study
may be defined as the transformation of a project idea into a broad investment
proposition.
A project opportunity study should not involve any substantial cost in its preparation, as
it is intended primarily to highlight the principal investment aspect of a possible
industrial proposition. The purpose of opportunity study is to arrive at a quick and
inexpensive determination of salient facts of an investment possibility.
2.3 Project identification steps
Project identification divided into four stages
1. Conceptual stage- project idea generated
2. Screening stage- which unviable project idea eliminated
3. Identification stage – which viable project idea selected
4. Prefeasibility stage- prefeasibility studies taking up

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 2.4 Approaches to project Identification
There are two major approaches to project identification

(a) Top-down approach

(b) Bottom-up approach

a) Top-Down Approach
 Projects are identified based on demands from beyond the community.

 This may include directives from:

 International institutions or NGOs that have determined particular priorities
 National policy makers identifying projects that pertain to national plans.
Advantages of Top-Down Approach
1. It may be a rapid response to disasters like floods or outbreak because there is limited
time and chance to consult the beneficiaries.
2. It can be effective in providing important services like education, health, water, roads etc.
3. It can contribute to wider national or international objectives and goals
and therefore potentially be part of a wider benefit (as in the case of trans-boundary
resources)
b) Bottom-Up Approach
 In this approach community/beneficiaries are encouraged to identify and plan the projects
themselves with or without outsiders.
Advantages of Bottom-Up Approach
1. Develops people’s capacity to identify problems and needs and to seek possible solutions to
them.
2. Provides opportunities of educating people.

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3. Helps people to work as a team and develop a “WE” attitude- makes project progressive and
sustainable.
4. Resources are effectively managed; dependence reduces, there is increased equity, initiative,
accountability, financial and economic discipline.
2.5 Project ideas conceived by:
 Individuals
 Groups of individuals (community)
 Local leaders
 NGOs
 Policy makers
 Planners
 International development agencies
Project ideas may be due to:
 Prevailing problems in a given area.
 Availability of resources in a given location.
 Clear project identification allows us to answers questions like:
a) How do the projects come about?
b) Where do projects come from?
c) Where they are?