The idea for an investment project rarely starts with the technology to be applied. Instead the investor normally takes as a starting point the availability of some resource or the identification of a good market opportunity. In the case of non-profit generating investments, the justification of the project almost always lies in the response to a social or community need.
However, once the market evaluation (or the utility of the benefits in the case of social or production support projects) has been adequately completed, it is necessary to consider the technology to be used.
The use of the word "technology" does not normally imply investment in advanced and costly equipment. To the contrary, most of the investments considered in this manual use only simple machinery. In fact, it is not uncommon in the case of agricultural projects, for the investment to be inferior to the need for working capital.
In preparing the detailed project, the appliants, together assumptions about the scale of the investment. A first step, therefore, is to reconfirm and, if necessary, make adjustments in the scale of production proposed in the initial profile. This in turn, normally requires the results of the demand analysis discussed in Chapter 3. The analysis of the market (or the demand for projects without market for their products) should indicate whether the scale originally proposed is realistic, in terms of the demand and the prices.
The amount of resources that are available also may be relevant in establishing the scale of production. Although the applicants are usually conscious of the limits set by the availability of land, they frequently forget to take into consideration the equally important need for water - for example, in irrigation projects.
Another basic resource that is often taken for granted is the availability of labour. Although a project may be intended to benefit the entire community, it is often difficult to find the necessary manpower, especially if the need occurs precisely during harvest time. The migration of men to work in other zones of the country during part of the year may also significantly reduce the availability of manpower in certain months.
What other factors may determine the appropriate scale for the productive activity? The following are worth noting:
Knowledge of, and experience in the market. The existence of a well established market for the product(s), the variability of prices from one month to the next, and the risks of losses (especially for perishable products) are all factors that should be taken into careful consideration when determining the scale of production.
Prior knowledge of the technology. If the technology proposed is well known, the participants are experienced in its use, and repair and maintenance services are readily available, a larger scale of production may be justified. On the other hand, if there is considerable uncertainty regarding the production process, or if the supply of raw materials is problematic, a smaller scale of production may be wiser, as long as it is consistent with the objectives of the project.
The number of persons or families in the group of applicants. Obviously, it makes little sense to propose a project that will generate $1,000 per year, if the project is expected to make a significant contribution to the incomes of 100 families.
Managerial capacity. Generally speaking, the larger the investment and the more people involved, the more complex the job of directing the work will be. If the applicant(s) have no prior experience in managing investments, it would be unwise to start with a major investment. The lack of management capacity is probably the prime cause of failure in small companies.
When determining the appropriate scale of investment, always bear in mind the possibility of carrying out the investment in phases; that is, starting small, with the intention of expanding in the future if all goes well. However, phasing of production is possible only if the required financial resources are available over a long period of time. If the applicants have only a single opportunity to access financing, then using a phased investment approach will not work.
Although the scale of the investment is, without a doubt, a primordial consideration in the selection of the technology, other elements must also be considered, even in the simplest of projects. Among these are:
What are the market requirements? If the market demands grain with no more than 12% humidity and the project is located in an area of heavy rainfall, it would be imprudent not to consider buying a drier, if the project involves grain production. If there is demand for shirts of a certain range of colours, it might be useful to include a dying plant as part of the investment necessary for a clothing factory. If the market pays a premium for out-of-season fruits and vegetables, it may be worthwhile to consider irrigation technology or greenhouses for a horticultural project.
What are the legal requisites regarding the environment or sanitation? The law might demand treatment of effluent from the production process (Chapter 5) and many countries require specific measures (e.g. tiling, drainage, stainless steel counters, and insect exclusion) in facilities used for processing foodstuffs.
Will it be necessary to warehouse raw materials or finished goods? When raw materials are available for only a few months out of the year, it may be profitable to invest in equipment (e.g. freezers) for the conservation of raw material and thereby extend the period of operations. If the prices of a finished good are highly variable, it might prove profitable to store the product (if it can be done) to sell in times of high prices.
How flexible should the production process be? Up to a point, capital investment (machinery and equipment) can be replaced by hand labour and vice versa (see the following illustration). It is, therefore, important to identify, at the outset, the relationship of the tasks that will be done by hand with the available manpower. Furthermore, due to their investment cost, or operating capacity, some technologies are simply uneconomical below a minimum production level. If there is doubt as to whether that level is achievable, in light of the scale of production desired (see above) it may be necessary to consider other alternatives
All of these factors should be considered as part of the technological evaluation. Frequently, neither the applicants nor those that help them will have the technological capacity to answer all of the questions that arise. At minimum, it is important to speak with several sales people to find out what technologies are available which might be appropriate for the needs of the project. Better yet, if the financial agency has access to non-reimbursable funds for technical assistance, would be to contract an independent specialist on the subject and work with that person. In this way you will be able to adequately consider the relationship between the market, the available resources and the production method.
A frequently forgotten factor in the technological calculation is the relationship between the technology chosen and the experience and capability of the investors. If the technology demands a management level beyond the abilities of the group, it could cause grave problems in the quality of the product, or simply result in the failure of the entire process.
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THE CHOICE OF TECHNOLOGY AND THE INVESTMENT PROCESS When speaking of the selection of technology, we are generally thinking of the technology that will be used in the operation of the investment (machinery, irrigation, etc.). But the investment process itself is also influenced by the technology selected, above all in the case of non-income generating investments, such as buildings, roads and watershed protection. In such cases it is important to balance the needs and requirements of the different participants. From the point of view of efficiency, for example, it might be better to contract a specialized company with the latest machinery to build the bridge within a few days. However, to ensure adequate local contribution and ownership, it will often be better to use simpler technology, which although slower, will allow the local inhabitants to contribute their manual labour and develop a pride of ownership in the structure. The technology may also influence maintenance needs. On the one hand, structures built with high technology might require less maintenance (such as an asphalt road) or work more efficiently (wells with electric or gasoline pumps instead of hand pumps). However, maintenance and repair might be beyond the capabilities of the community, and the sustainability of the project would suffer. |
For example, if a group without prior experience in aquaculture plans to develop three hectares of ponds for the intensive production of tilapia, the proposal should be treated with extreme caution. Any form of aquaculture is subject to high risks from diseases and predators that can eliminate an entire population from one day to the next. When dealing with an intensive system, where the concentration may be up to ten times the normal population, the possibility of disaster is very high. In this case there are two broad alternatives:
a) Convince the investors to use a less demanding technology
b) Contract the services of a professional operations manager, with ample experience in intensive production
Even in the case of a simpler technology (for example semi-intensive production), if the participants have no prior experience, access to technical support should be included as part of the investment cost.
In general, it is unacceptable for the project to learn on a trial and error basis during the initial stages of implementation; buyers who receive a product of poor quality, or which does not comply with the demands of the market, simply will not come back again. Technical support can come in the form of training of project staff before start-up, and having technical experts on call to deal with problems that may arise.
No amount or type of training can prepare a person for all of the possible events of real life. If a group of milk producers wants to open its own processing plant, it should not expect that a month long training course can prepare them adequately for the operation. As a minimum they will need frequent visits from an advisor, and would do much better to contract a specialist in milk production, to guide them through the first four or six months of the project.
The following points should be seriously considered when choosing a technology
Does the proposal call for very advanced, complicated or demanding technology? Unless the persons involved have ample prior experience with such technology, it is recommended that they contract an outside technical manager or select a simpler alternative.
In which of the operations will there be a need for training (or at least, a strengthening of existing capabilities) for the project’s personnel?
Will it be possible for the project staff to draw on outside technical support during the first months (or years) of the project’s activities? Would periodic visits be sufficient, or would the full time presence of an adviser be required for the initial months?
Will there be a need for quality control equipment? (testing laboratory, humidity or colour analysers, etc.) Who will operate this equipment? Must they be certified or otherwise qualified?
The need to consider the costs of repair and maintenance for the chosen technology is discussed in Chapter 6. Here we will consider the logistical side of the process. That is, when you select a technology you have to make sure that there exists a capacity to repair and maintain that equipment. This consideration applies not only to processing and manufacturing machinery, but also to vehicles and office equipment, especially "delicate" machinery such as copiers.
Among other factors for consideration are:
Does the equipment come with a guarantee or service contract, under which the manufacturer guarantees to keep it in good condition. If so, for how long does the guarantee or agreement last? Who does the manufacturer use for this work, and how far away are they based?
Are there other users of the same technology in the project’s operating area? Who are they? Are they satisfied with the attention they receive regarding parts and service?
What are the sources of parts for the machinery? Do these sources carry a broad enough inventory of parts? Or do they have to order them from the USA or from Europe? There is nothing worse than discovering, when a machine breaks down in the middle of the high season, that the vital part will take two weeks to arrive from the country of origin.
Does the machine need service by an expert, trained in the factory? Can any competent mechanic maintain the equipment? If a formally trained expert is needed, where is the nearest person? How much does he charge per visit?
