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Investment cycle phases and actions necessary for project implementation

The life cycle of an investment project is determined by three main phases:

  1. Initial (pre-investment) phase.

  2. Investment phase.

  3. Operational phase.

At the initial phase, potential initiators (owners) of the project must themselves find an answer to the question on feasibility and economic attractiveness of the entrepreneurial effort.

For this, it is necessary during the first stage to work out all economic aspects of the business idea for vitality.

The minimal set of actions for production organization projects includes the following:

  • carry out marketing analysis and examine the demand for the product or service to be provided;

  • develop an optimal financial model for the project;

  • develop an organizational-economic scheme of the project;

  • assess efficiency of investment in the project;

  • assess the risks;

This set of preliminary actions can be executed both as separate documents and as one common document including all the above mentioned aspects. Depending on the scale of the project and initiators’ preferences, it can be a business concept, business plan or investment memorandum formed at this stage as an internal document. This document provides project initiators with information for making a decision concerning feasibility of further action.

With satisfactory efficiency indicators and acceptable risk one can proceed to the second stage of planning, technical, technological, preliminary permissive and other decisions that will form the basis of the future project. These decisions are formed in the Feasibility Study of the project.

If the Feasibility Study satisfies the project initiators and they are ready to proceed with its realization, then during the third stage on the basis of decisions incorporated in the Feasibility Study corrections are introduced for the documents of the first stage, for instance – business concept. Besides, it may be supplemented by proposals for potential investors and further on can be used not only as an internal document but also as a document for attraction of external financing. Besides that, during the third stage additional presentation materials may be prepared to attract financing for the project.

For real estate projects the following aspects are worked out:

  • concept of territorial development;

  • analysis of the most efficient development of land plots

  • presentation materials to be shown to external information users of the project

Summing up the owners’ initiative realization during the initial stage, we can speak about the need for a thorough study of entrepreneurial effort and making a well-balanced investment decision considering the options:

  • the idea is viable and supported by calculations. The implementation work must be continued;

  • the idea is inviable, the calculations show that it does provide the owners (for example) with the required return on investment;

  • the idea is viable, but for the start of the project and transition to the investment phase the time is not right. There must be a pause for a more successful start.

During the investment phase of the project, concrete actions are taken requiring much bigger expenses and of irrevocable nature. During the investment phase of an industrial project design specifications and estimates are made; equipment is ordered; industrial sites are prepared; equipment is delivered and installed; start up and adjustment works are performed; personnel training is organized, advertizing campaign is carried out. For real estate objects, after preparation of project design specifications and estimates construction work is carried out corresponding to the most efficient use of the land plot. At this stage as a rule owners show initiative for attraction of external financing which includes:

  • loans;

  • issue of additional shares or securities;

  • leasing;

  • attraction of a financial or strategic partner to the project;

  • attraction of investment funds;

  • attraction of funds from other sources.

Besides that, it is necessary to study the legislative base of the region of investment. Regional legislation of RF subjects provides for the following types of state support:

  • investment tax credit;

  • regional budget guarantees;

  • reduction of interest rate on loans with regard to compensations stipulated by regional budgets during implementation of projects in priority areas for this region;

  • tax exemptions from three to seven years on priority projects for the region in case of favorable consideration of document according to the established procedure;

  • exemption rates for land plot lease for the construction period;

  • other kinds of government support.

In aggregate, state support may reduce project costs up to 10%. Besides this, there are legal exemptions in the tax and customs legislation such as reimbursement of VAT, reduction of customs duties to zero on a number of commodity code listing of external economic activity and other privileges.

Summing up the above on investment phase of the project, we can speak about serious reduction of investment costs of the project provide that:

  • there is comparatively cheap external financing;

  • maximally possible state support on federal and regional levels is obtained.

Operational phase

It begins from the date of putting principal equipment into operation (in case of industrial investment) or purchase of real estate or other assets. During this phase, the plant is put into operation, production or provision of services is started, external loans are paid back if they were used. This phase is characterized by appropriate income with consequent expenses.