Thursday 17 February 2022

Investment project and its effectiveness

The main definitions concerning the concept of "Investment Project" are given in the Federal Law "On Investment Activities in the Russian Federation Carried Out in the Form of Capital Investments" with subsequent additions and amendments, and in cases where the Law lacks the necessary definitions, they are based on its meaning. Let's consider the main concepts that are given in the "Recommendations", and then analyze them in more detail from the point of view of an applied nature.

Project. This term can be understood in two senses:

as a set of documents containing the formulation of the goal of the upcoming activities and the definition of a set of actions aimed at its achievement,

as this complex of actions (works, services, acquisitions, management operations and decisions) aimed at achieving the formulated goal,

i.e. as documentation and as an activity. In the "Recommendations for assessing the effectiveness of investment projects" in all cases, except for those specified specifically, the term "project" is used in the second sense, in the sense of activity.

The social significance (scale) of the project is determined by the impact of the results of its implementation on at least one of the (internal or external) markets: financial, products and services, labor, etc., as well as on the environmental and social situation.

Depending on the significance (scale), projects are divided into:

global, the implementation of which significantly affects the economic, social or environmental situation on Earth;

national economic, the implementation of which significantly affects the economic, social or environmental situation in the country, and when assessing them, it is possible to limit oneself to taking into account only this influence;

large-scale, the implementation of which significantly affects the economic, social or environmental situation in certain regions or sectors of the country, and when assessing them, it is possible not to take into account the impact of these projects on the situation in other regions or industries;

local, the implementation of which does not have a significant impact on the economic, social and environmental situation in the region and does not change the level and structure of prices in commodity markets.

Investments - funds (cash, securities, other property, including property rights that have a monetary value) invested in objects of entrepreneurial and (or) other activities in order to make a profit and (or) achieve another useful effect.

The Recommendations address investments in specific projects, characterized by their size, calculation periods, funding needs, etc.

The recommendations provide for the following sources of investment:

funds generated during the implementation of the project. They can be used as investments (in cases where the investment continues after the funds are put into operation) and generally include the profit and depreciation of production assets. The use of these funds is called self-financing of the project.

means external to the project, which include:

for investors' funds, see below (including own funds of an existing enterprise participating in the project) that form the share capital of the project. These funds are non-refundable: the individuals and/or legal entities that provided them are co-owners of the established production assets and consumers of the net income obtained through their use."

subsidies - funds provided on a grant basis: allocations from budgets of various levels, business support funds, charitable and other contributions of organizations of all forms of ownership and individuals, including international organizations and financial institutions;

borrowed funds (loans, borrowings) to be repaid on predetermined terms (repayment schedule, interest rate);

funds in the form of property provided for rent (leasing). The terms of return of these funds are determined by the lease (leasing) agreement.

Subsidies, cash borrowed funds, funds provided for rent (leasing) are not included in the share capital of the project and do not give the right to participate in the income of the project.

Capital investments - investments in fixed assets (fixed assets), including the costs of new construction, expansion, reconstruction and technical re-equipment of existing enterprises, the purchase of machinery, equipment, tools, inventory, design and survey work (PIR) and other costs.

Capital-forming investments are investments consisting of capital investments, working capital, as well as other funds necessary for the project. In the Recommendations, everywhere except for sections. P4.6 of Annex 4, the word "investment" means "capital-forming investment".

Investment project (IP) - justification of the economic feasibility, volume and timing of capital investments, including the necessary design and estimate documentation, developed in accordance with the legislation of the Russian Federation and standards (norms and rules) approved in accordance with the established procedure, as well as a description of practical actions for the implementation of investments (business plan). An investment project is always generated by some project (understood in the sense of the second definition), the rationale for the expediency and characteristics of which it contains. In this regard, certain properties, characteristics and (or) parameters of the IP (duration, implementation, cash flows, etc.) in the Recommendations are understood as the relevant properties, characteristics and (or) parameters of the project generated by it.

The effectiveness of an investment project is a category that reflects the compliance of the project generating this IP with the goals and interests of the project participants (see below). To assess the effectiveness of the, it is necessary to consider the project that generates it for the entire period of the life cycle - from pre-design study to termination. Therefore, the term "effectiveness of the investment project" ("effectiveness") is understood in the Recommendations as "project effectiveness". The same applies to performance indicators.

The financial feasibility of the investment project is the provision of such a cash flow structure in which at each step of the calculation there is a sufficient amount of money to implement the project that generates this IP. The terms "financial feasibility of the investment project" ("financial feasibility of the individual entrepreneur") and "financial feasibility of the project" in the Recommendations act as synonyms. Similarly, we can talk about "cash flows (inflows, outflows, payments and receipts) of individual entrepreneurs", referring respectively to the cash flows (inflows of outflows, payments and receipts) of the project related.

The organizational and economic mechanism of project implementation is a form of interaction between project participants, recorded in project materials (and in some cases in statutory documents) in order to ensure the feasibility of the project and the ability to measure the costs and results of each participant associated with the implementation of the project.

The organizational and economic mechanism of the project implementation in the general case includes:

normative documents on the basis of which the interaction of participants is carried out;

obligations assumed by participants in connection with their joint actions for the implementation of the project, guarantees of such obligations and sanctions for their violation;

investment financing conditions, in particular, the main terms of loan agreements (loan terms, interest rate, frequency of interest payment, etc.);

special conditions for the turnover of products and resources between participants (for example, the use of barter exchange, preferential prices for mutual settlements, the provision of commodity loans, the gratuitous transfer of fixed assets for permanent or temporary use, etc.);

a project implementation management system that ensures (in case of possible changes in the conditions for the implementation of the project) proper synchronization of the activities of individual participants, protection of the interests of each of them and timely adjustment of their subsequent actions in order to successfully complete the project;

measures for mutual financial, organizational and other support (provision of temporary financial assistance, loans, deferral of payments, etc.), including measures of state support;

the main features of the accounting policy of each russian participating enterprise, as well as foreign participating firms that receive income from participation in the project on russian territory.

The need to use information on the organizational and economic mechanism of project implementation arises primarily when assessing its commercial effectiveness (for each project participant, the most important will be those elements of this mechanism that affect its costs and revenues.

Individual elements of the organizational and economic mechanism at the stage of project implementation can be fixed and specified in the statutory documents and contracts between the participants.

The project participant is the subject of investment activity for this project. The project participants include the entities of investment activity listed in the Federal Law on Investment Activity, as well as society as a whole.

Shareholder - an investor who owns shares in the enterprise (organization) implementing the project.

Lender (lender) - an investor who provides borrowed funds for the implementation of the project. A creditor may simultaneously obtain rights to a certain share of profits or products produced, for example, acting as a shareholder of the enterprise being created or a borrowing firm.

It is recommended that the feasibility and effectiveness of the project be assessed taking into account uncertainties and risks (the methods of such accounting are set out in detail in Section 10 and Annex 9 of the Recommendations).

Uncertainty - incompleteness and / or inaccuracy of information about the conditions of the project, the costs carried out and the results achieved.

Risk is the uncertainty associated with the possibility of adverse situations and consequences during the implementation of the project. In contrast to uncertainty, the concept of "risk" is more subjective - the consequences of the implementation of the project, unfavorable for one of the participants, may be favorable for the other.

The Recommendations consider the impact on the implementation of individual entrepreneurs of such elements of the economic environment as various manifestations of inflation, participation in the implementation of individual entrepreneurs of various currencies, interest rates, and the taxation system.

Inflation is the increase in the general (average) price level over time. It is characterized by a general inflation index - an index of changes in the general (average) level of prices in the country and price levels for certain types of goods, works and services, counted from the initial moment - the moment of development of project materials.

The essence of investment contains a combination of two aspects of investment activity: the cost of resources and the results obtained.

Investments are made in order to obtain a result - quantitative (income) or qualitative (for example, in the field of education - the construction of a school and the growth of the number of educated people), they are useless if they do not bring results.

For the case of decision-making at the enterprise level, the costs can be attributed to investment, if as a result of the decision:

the structure, composition and volume of assets of an enterprise or a certain company change;

the impact of a decision is largely expected over a long period of time;

as a rule, significant costs are required.

Investment theory has traditionally been considered by Western economics as a central problem, solved from both micro and macroeconomic positions.

Microeconomic theory of investments focuses on the process of making investment decisions at the enterprise level, providing entrepreneurs with specific science-based methods for forming an optimal investment policy.

Macroeconomic theory of investment, the founder of which is D. Keynes, considers the problem of investment from the standpoint of the entire economy as a whole, focusing on state investment policy, income and employment policy.

To make a decision on a long-term investment of capital, it is necessary to have information that confirms two main assumptions:

first, the invested funds will be fully reimbursed;

secondly, the profit received from this operation will be large enough to compensate for the temporary refusal to use the funds, as well as the risk arising from the uncertainty of the final result.

Thus, the problem of making an investment decision is reduced to an analysis of the adequacy of the plan of the expected development of events and the likely consequences of its implementation to the expected result.

In the most general sense, an investment project is an investment of capital in order to subsequently generate income.

The forms and content of investment projects can be very diverse - from a plan for the construction of a new enterprise to an assessment of the feasibility of acquiring real estate. But in all cases, there is a time lag (delay) between the moment of the start of investment and the moment when the project begins to generate income.

The methodological basis of project analysis is the system concept of "project".

The project is an integral object, the essence of which is multifaceted:

first, from the moment of the birth of the project idea to the stage of its materialization in real objects (whether industrial enterprises or social infrastructure facilities engaged in the production of products or services), a certain time is required, which constitutes the life cycle of the project;

secondly, before investing money in the project, it is necessary to conduct its comprehensive examination in order to prove its feasibility and the possibility of implementation, as well as to assess its effectiveness in the technical, commercial, social, institutional, environmental, financial and economic aspects.

We have already considered the basic concepts that are used in the "Methodological recommendations for assessing the effectiveness of investment projects and their selection for financing" (hereinafter referred to as the Recommendations)

In the work of Shapiro V.D. (Shapiro V.D. etc. Project management.) the project is understood as a system of goals formulated within its framework, created or modernized for their implementation of physical objects, technological processes; technical and organizational documentation for them, material, financial, labor and other resources, as well as management decisions and measures for their implementation.

In another work (Investment Design: A Practical Guide to the Economic Justification of Investment Projects / Under the scientific editorship of SI. Shumilina. - M.: Finstatinform, 1995.) an investment project is understood as a comprehensive plan of measures (including capital construction, acquisition of technologies, purchase of equipment, training of personnel, etc.) aimed at creating a new or modernizing (expanding) the existing production of goods and services in order to obtaining economic benefits.

To a greater extent, the essence of project analysis is met by the interpretation of the project as a set of interrelated activities designed to achieve the goals set within a limited period of time and within a set budget.

Any project is implemented in a real external environment: at the input, the project draws resources from it to create products or provide any services, and at the output, the environment accepts the results of project activities. For the success of the project, it is impossible not to take into account its interaction with the external environment, which is carried out through a comprehensive examination of the project - a systematic, interrelated study of the internal and external environment of the project.

So, every project for its implementation needs resources - financial, material, labor - to carry out both the production process and the management process.

At the earliest stage of work with the project, there is a need to collect the most complete information about the scope of the project, about the participants of this project, about the legal support of the normal course of the production process. At the stage of development of project documentation, this information is supplemented and becomes comprehensive, which makes it possible to predict the progress of the implementation and operation of the project with a greater degree of validity.

In most specialized literature, investment projects are classified according to the degree of obligation, urgency and degree of coherence:

By degree of obligation:

Required. These projects are required to comply with rules or regulations. They can be designed to critically update assets, to maintain existing assets in working order. This type includes contract projects, i.e. designed to ensure contractual obligations, for example, investment projects for environmental protection.

Optional. This includes any optional development projects, for example, the replacement of failed equipment.

By urgency:

Urgent. These projects are either not available at all in the future, or lose their attractiveness when postponed, for example, various kinds of acquisitions.

Postponed. Along with urgent ones, there is a fairly large range of investments that can be postponed, while their attractiveness, although changing, is rather insignificant. An example is the reactivation of stopped wells.

By degree of connectedness:

Alternative. There are projects where the adoption of one draft precludes the adoption of another. These projects are like competitors for the resources of the company. These projects are evaluated simultaneously and cannot be carried out simultaneously. Examples are projects that completely exhaust the current resources of the company: the installation of satellite communications in the company and the drilling of a new field.

Independent. The rejection or acceptance of one of these projects does not affect the decision-making on the other project, these projects can be carried out simultaneously, their evaluation takes place independently. For example, the reconstruction of two unrelated divisions within the company.

Interrelated. The adoption of one draft depends on the adoption of another. These projects are evaluated simultaneously with each other as a project, resulting in a single decision.

But such a simplified classification system cannot describe all the projects encountered in practice and cannot reflect the features of financing, their significance, the role of industry affiliation, etc.

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